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Equity Swap
-is a situation where the creditor, for economic
or legal reasons related to the debtors financial
Equity Swap- transaction whereby a debtor and
difficulties, grants to the debtor concession
creditor, may renegotiate the terms of a
(either stems from an agreement between the
financial liability with the result that the liability if
creditor and debtor, or imposed by law or a
fully or partially extinguished by the debtor
court) that would not otherwise be granted in a
issuing equity instrument to the creditor
normal business relationship.
The objective of the creditor in a debt Equity swap- issuance of share capital by the
restructuring is to make the best of a bad debtor to the creditor in full or partial payment
situation or maximize recovery of investment. of the obligation.
PV of principal xx
PV of interest payment xx
PV of new liability xx
Face Value of new liability (xx)
Discount/Premium on liability xx
Liability-old xx
Add: accrued int. payable xx
CA of old liability xx
PV of new liability (xx)
Gain on extinguishment of debt xx
2. No substantial modification
Gain on extinguishment is less than 10%
of old liability
Gain is not recognized because the
modification is not an extinguishment if
the old liability
Old liability is continued with modified
interest charges. New Effective rate must
be computed.