Debt/Equity Swap


DEFINITION of 'Debt/Equity Swap'

A transaction in which the obligations (debts) of a company or individual are exchanged for something of value (equity). In the case of a publicly-traded company, this would generally entail an exchange of bonds for stock. The value of the stocks and bonds being exchanged are typically determined by the market at the time of the swap.

BREAKING DOWN 'Debt/Equity Swap'

A debt/equity swap is a refinancing deal in which a debtholder gets an equity position in exchange for cancellation of the debt. The swap is generally done to help a struggling company continue to operate (after all, an insolvent company can't pay its debts or improve its equity standing). However, sometimes a company may simply wish to take advantage of favorable market conditions.

Covenants in the bond indenture may prevent a swap from happening without consent.

  1. Swap

    A derivative contract through which two parties exchange financial ...
  2. Equity

    Equity is the value of an asset less the value of all liabilities ...
  3. Indenture

    A legal and binding contract between a bond issuer and the bondholders. ...
  4. Debt

    An amount of money borrowed by one party from another. Many corporations/individuals ...
  5. Covenant

    A promise in an indenture, or any other formal debt agreement, ...
  6. Bankruptcy

    A legal proceeding involving a person or business that is unable ...
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