Debt/Equity Swap

Shark Tank has been a fixture on ABC TV for over a decade. One of the interesting things is that the offers that come from the panel often reflect their backgrounds in finance. Kevin O’Leary and Robert Herjavec both made their reputations in Canada in the tech industry, in software and in IT security, respectively. Perhaps it’s the industry, the domicile or a combination of the two, but they are the ones who most often will propose a debt finance with a debt/equity swap once the the principal has been repaid by corporate revenues.

The debt/equity swap is when the outstanding amount of debt is exchanged for a percentage of equity that either has been predetermined or is reflective of market rate minus a discount.

One of the ways public companies raise additional funds is through convertible debt or preferred stock with a convertible factor, usually on perpetual call, meaning the company has the option to convert whenever it decides to retire the debt. In chapter 11 bankruptcy reorganization, creditors will often engage in a debt/equity swap in order to eliminate the company’s debt overhang, while giving the former creditors corresponding voting power to steer the company’s future direction.

See: Chapter 7.