Debt swap

There are several possible ways in which a debt swap can be done. However, the aim is usually the same – to refinance a borrower and strengthen its balance sheet.

There are several possible ways in which a debt swap can be done. However, the aim is usually the same to refinance a borrower and strengthen its balance sheet.

So, for example, if a large bank such as Anglo Irish gets into financial difficulty, a deal can be done in such a way that holders of high-risk 'subordinated' bonds are offered the chance to swap them for much lower-risk, government-backed securities. For the investor, the scheme offers the chance to get out of an investment that may never pay back future coupons and/or capital.

However, under the swap, they can expect to receive a much smaller value of the safer debt in return for existing riskier holdings. The borrower gets to book the difference between those two values as an accounting gain. That in turn strengthens its balance sheet and may improve its regulatory capital ratios.

See Tim Bennett's video tutorial: What is a balance sheet?

Most Popular

Is it cheaper to leave the heating on low all day?
Personal finance

Is it cheaper to leave the heating on low all day?

The weather is getting colder and energy bills are rising, but is it really cheaper to leave the heating on low all day or should you only turn it on …
1 Dec 2022
Gold or bitcoin: what will replace the US dollar?
Bitcoin & crypto

Gold or bitcoin: what will replace the US dollar?

As Russia and the West move further apart, there’s a growing need for a new global reserve currency. The US dollar could soon be replaced by gold or b…
6 Dec 2022
Radiator vs electric heater – which is cheaper?
Personal finance

Radiator vs electric heater – which is cheaper?

We compare the costs, pros and cons of radiators and electric heaters and see which one will help keep your energy bill as low as possible.
28 Nov 2022