Question

1. In the context of the “international debt crisis”, why were MNCs, international banks and national governments of less developed countries eager to utilize debt-for-equity swaps?

Answer 1

A debt/equity swap is a transaction in which the obligations or debts of a company or individual are exchanged for something of value, equity. In the case of a publicly traded company, this generally entails an exchange of bonds for stock. The value of the stocks and bonds being exchanged is typically determined by the market at the time of the swap.

Debt/equity swaps can offer its debt holders equity because the business does not want to or cannot pay the face value of the bonds it has issued. To delay repayment, it offers stock instead.

In other cases, businesses have to maintain certain debt/equity ratios, and invite debt holders to swap their debts for equity if the company helps to adjust that balance. These debt/equity ratios are often part of financing requirements imposed by lenders. In other cases, businesses use debt/equity swaps as part of their bankruptcy restructuring.

During International debt crisis the lesser developed nations issue equity rather than debt so as to protect their interests. In the event of default issuing equity is beneficial for the lesser developed nations.