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

Get set for another debt binge as real interest rates fall
UK Economy

Get set for another debt binge as real interest rates fall

Despite the fuss about rising interest rates, they’re falling in real terms. That will blow up a wild bubble, says Matthew Lynn.
15 May 2022
Is the oil market heading for a supply glut?
Oil

Is the oil market heading for a supply glut?

Many people assume that the high oil price is here to stay – and could well go higher. But we’ve been here before, says Max King. History suggests tha…
16 May 2022
Value is starting to emerge in the markets
Investment strategy

Value is starting to emerge in the markets

If you are looking for long-term value in the markets, some is beginning to emerge, says Merryn Somerset Webb. Indeed, you may soon be able to buy tra…
16 May 2022