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Debt for equity swaps are an important consensual restructuring tool used to help deleverage a company’s balance sheet in a tax efficient manner. They essentially involve one or more of the creditors of a company exchanging their debt for some form of equity. They can be used where a company is over-geared and the value of a company is less than the value of the debt it is seeking to service.
Debt for equity swaps are usually considered when they can’t re-bank and there is no possibility of a further equity injection. From a creditor’s perspective, they will be looking to a debt for equity swap to increase the likelihood of non-equitised debt being repaid, to preserve any enterprise value and to give them a share in any potential equity upside.
The type of equity can take different forms such as a separate class of shares (which should have the rights or ordinary shares for tax purposes) or other equity-based instruments, such as warrants or options.
The rights associated the equity instrument are key and are usually heavily negotiated. These include:
• negative controls (which are particularly important for consolidation/shadow director issues)
• a priority of return in favour of the creditor, and
• restrictions to preserve that priority (anti-dilution, no dividends etc)
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