Corporate Debt Restructuring: How Banks Approach Distressed Borrowers

Financial distress — whether triggered by a market downturn, an over-leveraged acquisition, a customer failure, or operational disruption — need not mean insolvency. UK law and banking practice provide a range of tools that allow a viable business to restructure its obligations, preserve value, and emerge from difficulty without the full destruction of a formal insolvency process. Understanding how banks approach a distressed borrower, and what options are available before formal insolvency, is essential for any business owner, board director, or investor holding debt in leveraged structures.

How Banks Identify and Manage Distress

The Early Warning System

Banks operate sophisticated early-warning systems that flag deteriorating credit quality long before a borrower misses a payment. Triggers include:

• Covenant breaches (leverage, interest cover, or minimum liquidity ratios falling below agreed levels).
• Requests for payment holidays, waivers, or maturity extensions.
• Deteriorating management accounts shared with the bank.
• Sector-level intelligence suggesting the borrower's industry is under stress.
• Informal intelligence from the relationship manager about operational difficulties.

When a borrower's credit quality deteriorates, the relationship manager's role changes. Routine servicing is supplemented or replaced by active risk monitoring. The file is escalated from the front-office relationship team to the bank's credit risk or special assets team.

The Special Assets / Restructuring Team

Large UK banks maintain specialist teams — variously named "Restructuring," "Special Assets," "Business Support," or "Recovery" — to manage accounts that cannot be serviced normally. Clients should understand that the transition from relationship manager to restructuring team is significant: the relationship manager's primary goal is the banking relationship; the restructuring team's primary goal is recovery of the bank's exposure.

This does not mean the restructuring team is adversarial. In most cases, a bank's interests and a borrower's interests are aligned: the bank wants to recover its money, and the best path to recovery is usually a restructured business that can continue to service its debt, rather than a liquidation that destroys value. However, once a file enters the restructuring team, the dynamic changes: timelines are set by the bank, and requests for time require justification.

Standstill Agreements

A standstill agreement (also called a forbearance agreement) is the standard first step in a formal restructuring process. The bank agrees not to enforce its rights (not to demand repayment, not to appoint receivers) for a defined period — typically 60 to 180 days — to allow the borrower and its advisers to develop a restructuring plan.

In return, the borrower typically agrees to:

• Provide frequent management information (weekly or monthly trading reports, cash flow forecasts).
• Appoint independent advisers (typically a firm of restructuring accountants, often one approved by the bank).
• Not to take certain actions without the bank's consent (paying dividends, making non-essential capital expenditure, repaying subordinated debt).
• Appoint a chief restructuring officer (CRO) in larger cases.

A standstill buys time. It is not a solution; it is the prerequisite for developing one.

Restructuring Tools

Loan Extension and Maturity Extension

The simplest restructuring tool: the bank agrees to extend the maturity of the debt, giving the borrower more time to sell assets, grow into its leverage, or refinance with another lender. Often combined with a step-down in the loan amount (partial amortisation) to demonstrate forward progress.

Covenant Waiver or Reset

If the borrower has breached a financial covenant, the bank may grant a waiver (ignoring the historical breach) or agree a reset (new covenant levels at more appropriate thresholds). Covenant amendments are typically subject to an amendment fee and require updated due diligence.

Interest Holiday

A temporary suspension of cash interest payments, with interest accruing (rolling up) to be paid later. Preserves cash in the business during a distressed period. Banks dislike interest holidays because they worsen the ultimate loan recovery position, but they are sometimes the only viable option to keep a business trading.

Payment-in-Kind (PIK) Interest

PIK interest is interest that, instead of being paid in cash, is added to the principal of the loan. The borrower owes more at the end than at the beginning. PIK is used in leveraged finance structures where cash interest would be unsustainable in the near term; it concentrates the repayment obligation at maturity or on exit. PIK compounds — interest on interest — and can significantly increase the ultimate debt burden if left unaddressed.

Debt-for-Equity Swap

The bank converts some or all of its debt into equity in the borrower company. The debt is extinguished; the bank becomes a shareholder. This is used in complex restructurings where the business is viable but the debt quantum is unsustainable — the company needs a lighter balance sheet to operate effectively.

Debt-for-equity swaps are more common in private equity-backed transactions, where the equity structure is already complex and the bank may be converting alongside PE sponsor write-downs. Banks generally prefer debt; they become equity holders only when they believe the equity will recover more value than a distressed debt recovery.

Asset Disposal Programme

A structured sale of non-core assets to reduce debt. The bank may require proceeds to prepay the loan (often at a discount to face value if the loan is already impaired). Agreeing which assets are core and non-core, and at what pace disposals must occur, is often a point of negotiation between the bank and the borrower.

Scheme of Arrangement

The Scheme of Arrangement is one of English law's most powerful and internationally respected restructuring tools. Under Part 26 of the Companies Act 2006, a company can propose a restructuring scheme to its creditors that, once approved by the required majority and sanctioned by the Court, binds all creditors in the relevant class — including dissenting minorities.

The approval threshold is 75% by value and a majority by number of creditors in each class. Once those thresholds are met and the Court sanctions the scheme, even creditors who voted against are bound.

Schemes are used for:

• Reduction of debt by converting it to equity.
• Extension of maturities across a complex creditor group.
• Cramming down dissenting creditors who are blocking a commercially viable restructuring.
• Restructuring cross-border debt where English law governs the facility agreements.

The creditor-class definition is often the most contested aspect: creditors with different economic interests must be placed in different classes. If the class composition is challenged successfully, the scheme may fail.

Restructuring Plan (Part 26A): introduced by the Corporate Insolvency and Governance Act 2020 (CIGA 2020), the Restructuring Plan is a newer and more powerful variant that can cram down entire classes of dissenting creditors — even if the 75% by value threshold is not met in that class — provided the Court is satisfied that the dissenting class is no worse off than in the most credible alternative (typically liquidation).

Pre-Packaged Administration

A pre-packaged administration (pre-pack) is a sale of the business and assets of a company that is agreed and documented before an administrator is appointed, executed immediately upon or shortly after appointment. The administrator then completes the pre-agreed sale.

The advantage is speed and continuity: the business does not stop trading; customers, suppliers, and employees are not aware of a formal insolvency process; value is preserved. The sale is typically to a newly incorporated vehicle (sometimes controlled by the existing shareholders — a "connected party" pre-pack), which acquires the assets without the liabilities.

Pre-packs are controversial because:

• Unsecured creditors (trade suppliers, former employees) typically receive nothing — their claims stay with the failed entity.
• Connected party pre-packs can appear to be a mechanism for existing owners to "reset" without adequately compensating creditors.

The Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021 introduced requirements for "substantial" connected-party disposals made within the first eight weeks of administration: the administrator must obtain either independent scrutiny by an "Evaluator" who reports on whether the consideration and grounds for the disposal are reasonable, or approval from creditors, before the sale can proceed. This has improved transparency.

Personal Guarantee Enforcement

Many SME bank loans — particularly where the business has limited track record or insufficient assets to support the lending — are supported by personal guarantees from the directors or shareholders. A personal guarantee is a commitment by the individual to repay the loan if the company defaults.

On a company default, the bank can enforce the guarantee directly against the individual guarantor. Key points:

• Guarantors should ensure they understand the scope of the guarantee — whether it is limited or unlimited in amount, whether it covers the entire facility or specific tranches.
• A guarantor should take independent legal advice before signing.
• Guarantees can be called even if the director disputes the legitimacy of the underlying demand.
• Enforcement can lead to personal insolvency (bankruptcy) if the guarantee liability exceeds the guarantor's personal assets.

Banks are not required to exhaust remedies against the company before calling on the guarantee, unless the guarantee specifically requires this. In practice, banks often issue demands simultaneously against the company and the guarantor.

CIGA 2020: Key Reforms

The Corporate Insolvency and Governance Act 2020, passed in response to the COVID-19 crisis, introduced several significant reforms to UK insolvency and restructuring law:

• Moratorium: a new standalone moratorium of 20 business days (extendable) during which creditors cannot take enforcement action, receiverships cannot be appointed, and court proceedings cannot be issued against the company — providing breathing space to develop a rescue plan. A licensed insolvency practitioner (the "monitor") oversees compliance.

• Restructuring Plan (Part 26A): as described above, a Court-sanctioned plan that can cram down dissenting classes.

• Prohibition on ipso facto clauses: suppliers cannot terminate contracts simply because a customer enters insolvency, administration, or a moratorium. This helps preserve key contracts during a restructuring.

These tools collectively strengthen the UK's position as one of the most creditor- and debtor-friendly restructuring jurisdictions in the world. Combined with the established Scheme of Arrangement and Administration regime, English law provides a comprehensive toolkit for distressed debt situations.

Note: corporate debt restructuring involves complex legal and financial considerations. The position described in this guide reflects UK law and banking practice as of mid-2026. Rules and practices in other jurisdictions differ significantly. Always seek specialist legal and insolvency advice at the earliest sign of financial distress — early professional engagement significantly improves outcomes.

How Global Investments Can Help

For business owners and investors involved in leveraged property or commercial structures facing debt serviceability challenges, the path through restructuring is rarely straightforward. Global Investments works with clients across international markets and can connect you with specialist restructuring advisers, insolvency practitioners, and lenders experienced in distressed debt situations.

Whether you are a borrower seeking to understand your options or an investor holding debt that has become distressed, early engagement with qualified advisers — rather than waiting for formal default — maximises the range of solutions available. Contact us to discuss your situation in confidence.