Deal-for-equity swaps

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

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.

The swap is bad news for shareholders because it creates extra shares that they are not entitled to buy, diluting their existing holding. But the alternative, a forced liquidation initiated by lenders, often leaves shareholders with nothing at all.

Most Popular

Should you take a 25% tax-free pension lump sum in instalments?
Pensions

Should you take a 25% tax-free pension lump sum in instalments?

Taking out a 25% tax-free lump sum sounds appealing but it might not be the best way to manage your pension
30 Sep 2022
Markets may have bounced, but this is not the end of the bear market
Stockmarkets

Markets may have bounced, but this is not the end of the bear market

Stocks are back on the rise, commodities and precious metals prices are up – even the pound has rebounded. But none of this is typical of bull markets…
5 Oct 2022
October’s Premium Bonds: how to check if you are a winner
Savings

October’s Premium Bonds: how to check if you are a winner

NS&I has added almost 110,000 more prizes to October’s Premium Bond draw – are you a winner?
4 Oct 2022