Debt-for-debt Swap

Brief Definition

A debt-for-debt swap is a financial transaction where a company exchanges its existing debt obligations for new debt with different terms.

Further Explanation

A debt-for-debt swap is a financial transaction where a company exchanges its existing debt obligations for new debt with different terms. This is often done to take advantage of more favorable interest rates, extend the maturity of the debt, or change the type of debt to better align with the company’s financial strategy. The primary goal is to improve the company’s financial position without having to issue new equity or raise cash.

Example:
A company has a $1 million loan with an interest rate of 8% that matures in two years. To reduce its interest expenses, the company negotiates with the lender to exchange this loan for a new $1 million loan with an interest rate of 5% that matures in five years. This swap helps the company save on interest payments and gives it more time to repay the debt.