What is debt rescheduling?
Debt rescheduling refers to restructuring the terms of an existing loan. The debt can be rescheduled as follows:
- Reduce payment amounts by extending the payment period and increasing the number of payments.
- Pause payments or reduce payment amounts during a given period and then increase the amount of the monthly instalments.
What is debt rescheduling for?
When a borrower faces a temporary economic issue (liquidity issue, seasonal drop in sales, etc.) or another unforeseen event (accident, illness of the manager, natural disaster, etc.), it may be unable to fulfil payments or repay the instalments in time.
In this case and if the borrower collaborates with October, rescheduling the debt may give time to the company to normalize their cash flow situation, recover from its temporary issue and avoid default.
For lenders, a debt rescheduling represents a better option than default since you will keep on receiving monthly repayments. For borrowers, it is an alternative to late fees and reputational harm.
Who decides the debt rescheduling?
The private and institutional lenders who financed the project can grant a debt rescheduling to the borrower through a vote organised by October.
As soon as the borrower requests the rescheduling of its loan, October sends an e-mail to the community who lent to the project and presents the current situation of the company, the implications of the debt rescheduling, the rules of the vote and its deadline. Lenders in favor of the rescheduling are to answer YES to the e-mail whereas lenders against are to answer NO. At the end of the vote, the Lender Relations counts the votes and shares the results by e-mail.
Each vote has a weight that is proportional to the amount invested. If the majority of votes from private and institutional lenders are positive, then the debt rescheduling is accepted and implemented on the agreed date.
How are rescheduled projects displayed in your portfolio?
Rescheduled loans will appear on the Loans page of your portfolio under the label “Rescheduled”.
In case of rescheduling, October will apply a 40% provision to your outstanding capital. Indeed, restructuring the terms of a loan does not guarantee that the borrower will honor the future repayments. Debt rescheduling represents a solution to the company’s economic issues and it does not ensure the recovery of the company.
Therefore, in case of debt rescheduling, we estimate of a potential loss on the project to enable you to get an accurate picture of your portfolio.
To have more information on how this provision affects your portfolio, consult our tutorial.