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Debt for Equity Swaps

What is it all about?

In recent years, in particular, we hear a lot about debt for equity swaps. Debt for equity deals occur when large companies run into serious financial trouble, and often result in these companies being taken over by their principal creditors.

A debt for equity swap is a capital reorganisation of a company where a bank or other creditor converts indebtedness owed to it by the company into one or more classes of the debtor company’s share capital. This is typically driven by the bank or other creditors of the company.

Such a reorganisation may occur where the debtor company is in distressed state but its creditors do not believe that the situation warrants the appointment of a receiver or liquidator. Any such appointment would mean that the creditors are likely to receive a lesser return than if they substitute some of their debt for equity. The hope is that with a lower debt repayment profile they will receive an acceptable return on their equity once the company returns to profitability or is sold.

A debt for equity swap has no set structure. The swap may simply comprise a direct exchange of debt or shares in the company. In more complex cases, a new company funded by debt and equity provided by the bank and other creditors and investors may be formed to acquire the existing business from a liquidator or examiner appointed to the financially distressed debtor company.

If you need advice on this area please get in touch with us and call FMB on 01 645 2002.

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