Debt for equity swaps—an introduction

Debt for equity swaps—an introduction
Marc Trottier, restructuring and insolvency partner at Berwin Leighton Paisner, looks at the benefits and drawbacks of swapping debt for equity in the restructuring of a company.

How can debt for equity swaps add to the restructuring of a company?

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.

In what circumstances would a debt for equity swap be appropriate?

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.

What constitutes an equity interest for the purposes of the swap?

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)

The rights may also include the right for the creditor to appoint a director to the board of the company. Finally, the e
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About the author:
Kathy specialises in restructuring and cross-border insolvency. She qualified as a solicitor in 1995 and has since worked for Weil Gotshal & Manges and Freshfields. Kathy has worked on some of the largest restructuring cases in the last decade, including Worldcom, Parmalat, Enron and Eurotunnel.