A company is considering a debt-for-equity swap. The existing equity is held by management (20%) and a PE sponsor (80%). The company has €200M debt and is worth €100M. If the debt is converted entirely to equity, what is the dilution to existing shareholders, and how would you structure the swap to align incentives?
An advanced Restructuring question — expect it in final rounds and case-heavy interviews (IB, PE, Big-4 Transaction Services).
THE SHORT ANSWER
Existing shareholders are fully diluted because the enterprise value is less than debt. They receive 0% new equity. To align incentives, you can grant management a small equity kicker (e.g., 5-10%) as part of the restructuring, subject to performance targets. The PE sponsor typically gets wiped out. The debt holders become the new owners. Structuring requires negotiating the split among creditors and possibly providing new money to improve recovery.
WHAT INTERVIEWERS LISTEN FOR
- ✓Full dilution when EV < debt
- ✓Management incentive plan
- ✓Creditor ownership split
- ✓New money considerations
COMMON MISTAKES
- ✗Saying existing shareholders retain some equity without new money
- ✗Ignoring management retention
- ✗Assuming all creditors convert equally
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