Editing Debt restructuring (section)

=== Debt-for-equity swap ===
In a debt-for-equity swap, a company's [[creditor]]s generally agree to cancel some or all of the [[debt]] in exchange for [[shareholder's equity|equity]] in the company.<ref>{{Cite web|last=Lee|first=Matt|title=What is a Debt for Equity Swap?|url=https://www.investopedia.com/ask/answers/06/debtequityswap.asp|access-date=2021-02-18|website=Investopedia|language=en}}</ref>

Debt for equity deals often occur when large companies run into serious financial trouble, and often result in these companies being taken over by their principal creditors. This is because both the debt and the remaining assets in these companies are so large that there is no advantage for the creditors to drive the company into bankruptcy. Instead the creditors prefer to take control of the business as a [[going concern]]. As a consequence, the original shareholders' stake in the company is generally significantly diluted in these deals and may be entirely eliminated, as is typical in a [[Chapter 11 bankruptcy]].

Agreements to swap debt for equity also often occur because companies are obliged to comply, per the terms of a contract with certain lending institutions, with specified [[Debt-to-equity ratio|debt to equity ratios]].<ref>{{Cite web|last=Lee|first=Matt|title=What is a Debt for Equity Swap?|url=https://www.investopedia.com/ask/answers/06/debtequityswap.asp|access-date=2021-02-18|website=Investopedia|language=en}}</ref>

Debt-for-equity swaps are one way of dealing with [[Subprime lending|sub-prime]] mortgages. A householder unable to service his debt on a $180,000 mortgage for example, may by agreement with his bank have the value of the mortgage reduced (say to $135,000 or 75% of the house's current value), in return for which the bank will receive 50% of the amount by which any resale value, when the house is resold, exceeds $135,000.