Debt consolidation

Consolidation ( or consolidation ) is in finance the conversion of short-term debt into long-term.

General

Consolidation with regard to the conversion of short-term debt into long-term, there may be at private individuals, companies, governments or their subdivisions as provinces or municipalities. In budgetary leading corporations is spoken of fiscal consolidation. The debtor can consolidate their debts or simple securitized bonds in debt. Objectives can be general equalization of repayment burdens for the purpose of liquidity relief, securing a lower long-term interest rate fixed, improving the balance sheet image or balancing the budget. Consolidation can be taken as a regular operation, in order to achieve these goals. However, it can also be used as part of a redevelopment phase.

Implementation

Either the conversion of short-term debt into long-term already in the conclusion of a credit agreement with short-term maturities ( 1-2 years) was provided from the outset or the debtor later decides to reschedule its short-term debt with long-term.

The planned short-term financing is a so-called bridge financing ( " bridge loan" ), which are available in two forms:

• In the subsequent pre-financing long-term post-delivery financing is not ensured by a creditor;
• In the interim financing is already a long-term loan commitment.

The subsequent consolidation arises mostly from the fact that a large number of short-term debt (possibly with many creditors ), which. Due to a long-term lending of funds by a creditor only only to be replaced a few or In the latter case, the consolidation of a solid financial plan ensures, as the follow-up financing risks are eliminated and there is a harmonization of the interest rate and repayment dates.

Similar purposes the consolidation loan. It is a bond that arises from the combination of several older bonds and other loans to a single, mostly long-term bond with often more favorable conditions. This process is called unification.

Legal Issues

The consolidation of short-term debt is usually done by way of novation, ie by replacing a previous obligation by a new one. An express statutory provision is lacking in Germany; but the novation derives from § 311 para 1 BGB. Will the new, long-term debt due, therefore, automatically turns off the old debt by being redeemed by payment of the new debt. Ordered collateral disappear in the eradication of the old, current liabilities, must therefore be renegotiated for the long-term credit. The consolidation can be a credit event, if they - or the induced conversion of short-term into long-term debt - is mentioned in a loan agreement, bond, or a credit default swap.

Demarcation

The term consolidation there in company with other content. The debt consolidation pursuant to § 303 paragraph 1 HGB relates to the consolidated financial statements and has nothing to do with the change of maturities in debt. In the consolidated question is rather to set off mutual claims and liabilities of the Group members in order to no longer display it in the financial statements; this process is called debt consolidation. Such " in-group balances" has to be settled also in accordance with IAS 27.17.

• Financing
• Banking