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.
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Finance: What is the Debt-to-Equity Rati...11 Views
finance a la shmoop what is the debt to equity ratio? well simply put this ratio
answers the question who owns the company like if the debt to equity ratio
is high like there's tons of debt and very little equity well, then
essentially the bank or whoever the lenders are owned the company or at [Assets transfer to bank]
least the lion's share of the assets comprising it the opposite is true as
well of course and you can imagine a well-heeled company with tons of cash
and other assets like land and oil wells and Technology IP and no debt well they
could have a debt to equity ratio of zero so why do you even track this kind
of ratio well when companies are young they tend to not have tons of equity and
over time as they grow and get good at whatever it is they do they will [Clock rapidly ticks forward]
accumulate valuable assets like cash which are tracked as equity or
shareholders equity on the balance sheet that lives right here think about it if [Balance sheet appears]
this side is assets and this side is liabilities well if you're subtracting
liabilities from assets and you still have a lot of assets left over that's a
good thing and that line is tracked right here in the shareholders equity [Shareholders equity highlighted on balance sheet]
line ..........
you have a company with two billion dollars in debt at 5% interest costing a
hundred million bucks a year to rent if the company's shareholders equity is
just 50 million dollars well, the company is essentially owned
predominantly by its debt holders or lenders should something go wrong even a [A bank vault full of money]
little bit wrong well the company will go bankrupt the debt holders would own all
that equity and well spin this around and if the company's equity comprises 10
billion dollars of cash and a bunch of other assets for a total of 20 billion
of equity well then you can imagine the debt to equity ratio of just 10% that's
the equity holders of the company, they'll sleep like babies [Man taking a nap]