Restructuring Options

Debt for equity swaps

Debt for equity swaps provide creditors with an alternative option to recovering debt in, or in a manner that may lead to, a formal insolvency proceeding. They offer creditors an opportunity to take a longer term view on the equity value of a borrower group.

A creditor acquiring equity (which may also include stapled or non-stapled debt securities) will be concerned to structure the swap in a way that is tax efficient with respect to distributions or interest payments and transfer of the shares/securities.

Jersey's tax neutral environment, pursuant to which a creditor will, in general terms, not be subject to local tax on distributions or interest payments by the newly incorporated Jersey company, or stamp duty or other taxes upon transfer of the shares/securities, makes it appealing, although each party will need to consider its individual circumstances and seek professional advice where necessary.

The rise in debt for equity swaps where bondholders have used a new Jersey incorporated holding company is, as mentioned above, no doubt driven in part by the current economic climate.

The increasing trend of alternative lenders participating in finance and restructuring transactions where they may hold equity and debt interests in the same structure has also been a feature of this area. Alternative lenders often have the flexibility to participate in debt for equity swaps which may not appeal to more traditional lenders, which presents opportunities for overleveraged businesses to undertake a restructuring that may not otherwise have been possible. Whilst alternative lenders may have additional flexibility to participate, all creditors will have a collective objective of negotiating and implementing the swap in a manner that strikes a balance between ensuring the viability of the business as a going concern and recognising the enhanced credit risk of converting debt to equity.