Deal-for-equity swaps

In a debt-for-equity swap, some of a firm's debt is cancelled and lenders are given shares.

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Firms basically have two sources of external finance: bank loans ('debt') and funds from shareholders ('equity'). In a debt-for-equity swap, some of a firm's debt is cancelled and lenders are given shares.

This is often a sign that a firm is in trouble- perhaps unable to make the cash needed to meet interest payments, or in breach of the debt-to-equity ratio specified by lenders and unable to raise extra capital via new bank loans, or from shareholders via a rights issue.

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