Brief Definition
A debt-for-equity swap is a financial restructuring strategy where a company’s creditors agree to exchange a portion or all of their debt for equity in the company.
Further Explanation
A debt-for-equity swap is a financial restructuring strategy where a company’s creditors agree to exchange a portion or all of their debt for equity in the company. This means that the creditors become shareholders, and the company’s debt is reduced. This swap is typically used when a company is facing financial difficulties and cannot meet its debt obligations. By converting debt to equity, the company can improve its balance sheet, reduce interest payments, and potentially avoid bankruptcy.
Example:
A company owes $10 million to its creditors but is struggling to make the payments. The creditors agree to exchange their debt for shares in the company. If the debt is converted to equity at a rate of $1 million for 10% ownership, the creditors would receive 100% ownership of the company in exchange for the full $10 million debt. The company no longer has the $10 million debt burden, and the creditors now own the company.