Explain a debt-to-equity swap and its implications.
A core Restructuring interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
Creditors convert debt claims into equity ownership. Impact: reduces leverage immediately, eliminates debt service on converted portion, aligns creditor and equity interests. Implications: existing shareholders are diluted (often wiped out), creditors become new owners and need governance representation, may trigger tax consequences (debt forgiveness income). In practice, often combined with new money injection by the new equity holders.
WHAT INTERVIEWERS LISTEN FOR
- ✓Debt converted to equity
- ✓Reduces leverage
- ✓Dilutes existing shareholders
- ✓Creditors become owners
- ✓Tax implications
COMMON MISTAKES
- ✗No mention of dilution
- ✗Ignores tax consequences
- ✗Thinks it's always beneficial
Reading isn't the same as answering under pressure.
Interviewers don't hand you the model answer — you deliver yours on a clock. Practice this and 1,000+ questions with AI feedback on every answer.
RELATED QUESTIONS
- How do you assess whether a company is over-indebted (ueberschuldet)?
- Explain the concept of 'new money' and super-seniority in a restructuring.
- Walk me through a waterfall analysis. A company has €200M EV, €120M senior secured, €80M unsecured, €50M mezzanine. Where does value break?
- How does a liquidation analysis work and why is it important in restructuring?
- A client has €80M EBITDA and €400M net debt. Senior secured €250M, unsecured €150M. How would you analyze the capital structure in a restructuring scenario?
- Explain structural subordination and why it matters.