Debt/Equity Swap

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Definition of 'Debt/Equity Swap'

A debt/equity swap is a financial transaction in which a company or other entity exchanges a debt obligation for an equity stake in the company. This can be done for a variety of reasons, such as to reduce the company's debt burden, to improve its capital structure, or to provide the company with additional capital.

There are two main types of debt/equity swaps:

* **Cash-settled swaps:** In a cash-settled swap, the company that is issuing the debt pays the counterparty an amount of cash equal to the difference between the value of the debt and the value of the equity.
* **Physical-settled swaps:** In a physical-settled swap, the company that is issuing the debt issues new shares of stock to the counterparty in exchange for the debt.

Debt/equity swaps can be beneficial for companies in a number of ways. For example, they can:

* Reduce the company's debt burden.
* Improve the company's capital structure.
* Provide the company with additional capital.
* Reduce the company's interest payments.
* Increase the company's flexibility.

However, debt/equity swaps can also be risky. For example, they can:

* Increase the company's risk of default.
* Reduce the company's liquidity.
* Dilute the company's ownership.
* Increase the company's tax burden.

Before entering into a debt/equity swap, a company should carefully consider the risks and benefits involved.

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