What is a Debt for Equity Swap?

 

Certain companies may occasionally need to restructure their financing throughout their business life.  One of the reasons this may happen pertains to wanting to stay within their contractual agreements.  Some lenders require a company to maintain a certain debt to equity ratio.  Other times a company may not want to pay face value payments or make their coupon payments.  An option to avoid such thing is to partake in a debt for equity swap.

A debt for equity swap is just what it sounds like, it’s when companies swap equity for their debt.  This is typically done with only a portion of the outstanding debts.  For this to happen the creditors must agree to the trade.  The price of the swap is dependent on the market rates that are currently going on. 

On some occasions, the decision makers may offer a higher exchange value for their debt.  This is done in order to attract the debt holders to the offer and make the exchange seem more appealing to the creditors. 

Alternatively, some people opt for an equity/debt swap.  This is essentially the opposite of a debt for equity swap.  In an equity for debt swap the shareholders are allowed to exchange their stock for bonds in the company. 

Although there are two options under this category, it is typically the debt for equity option that is used the most.  This is the one that offers financial relief to the business that is in need of restructuring.