What is meant by the phrase debt for equity swap?
This situation often arises where a company is in some financial trouble and is, for example, having problems in financing its debt (such as being able to repay the interest on its loans). Such a swap may involve the lender being offered shares in the company to the equivalent value, thereby reducing (or eliminating) its debt, whilst the lender is hoping that the company will continue to prosper and it will benefit from share price growth and dividends in the future. The debt-for-equity swap is not such good news for existing shareholders, since they are diluted without being offered the chance to buy new shares. On the other hand, this is preferable to liquidation of the company, whereby shareholders would end up receiving nothing at all, with the value of their holding ultimately destroyed.
