The following Restructuring & Insolvency practice note provides comprehensive and up to date legal information covering:
A popular restructuring method is a debt for equity swap; financial creditors receive equity in the restructured vehicle in return for reducing or cancelling their debt claims against the company (and the rest of the group).
Many highly levered deals have thin equity cushions and existing shareholders quickly find themselves 'out of the money'.
The debt for equity swap reduces balance sheet liabilities and allows lenders to take some of the upside following a restructuring once the company returns to profit (as equity holders, entitled to dividends once there are sufficient distributable reserves) or on any subsequent sale.
The valuation will show where value break; that tranche will expect to receive the most equity post-restructuring (see Practice Note: Where the value breaks and negotiating strength).
The introduction of the corporate rescue exemption found in section 322(5E) of the Corporation Tax Act 2009 (CTA 2009) may reduce the popularity of the debt to equity swap as a restructuring tool. The debt to equity swap was often used to take advantage of the exemption in the CTA 2009, which allowed for the release of debt in exchange for shares without giving rise to a tax charge on the company. The corporate rescue exemption allows for the cancellation of a debt without a tax charge for a distressed company without the need to issues shares where certain insolvency
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