Debt-Equity Swap Law and Legal Definition

A debt equity swap is a type of financial restructuring whereby a debt is exchanged for a predetermined amount of equity or stock. A debt-equity swap often occurs when the company is in financial trouble and is otherwise unable to repay the creditor(s) anything without going bankrupt. The number of shares of stock awarded is determined by the amount of outstanding debt and the stock's value. The value of the swap is determined usually at current market rates, but management may offer higher exchange values to entice share and debt holders to participate in the swap. This can also help companies to boost their bond ratings or change their capital structure to take advantage of current stock valuation.