Debt-for-Equity Swap
A transaction in which creditors exchange outstanding debt claims for equity shares in the debtor company.
What is Debt-for-Equity Swap?
A debt-for-equity swap is a financial restructuring transaction in which a creditor surrenders its claim on a company's outstanding debt in exchange for newly issued equity shares. The exchange is negotiated based on the current market value of the debt (often trading at a discount) relative to an agreed equity valuation of the reorganized company. Debt-for-equity swaps are most commonly executed as part of a bankruptcy reorganization under Chapter 11, where senior secured creditors receive equity in the restructured entity in lieu of cash repayment. They reduce the company's leverage, eliminate cash interest obligations, and allow operations to continue, while creditors exchange the certainty of a fixed claim for the upside potential of equity ownership in the reorganized business.
Example
After filing for Chapter 11 bankruptcy in May 2020 due to pandemic-related travel collapse, Hertz Global Holdings executed a debt-for-equity swap as the cornerstone of its reorganization plan, which was confirmed by the bankruptcy court in June 2021. Secured creditors holding approximately $5 billion in fleet-related and corporate debt received new equity in the reorganized Hertz, while the old common stock was effectively wiped out. Hertz emerged from bankruptcy and relisted on Nasdaq as HTZ in November 2021.