understanding financial jargon
A debt swap is designed to refinance a company and strengthen it's balance sheet. For example, when a large bank gets into financial difficulty the government can offer holders of high risk subordinated debt the chance to swap their debt for lower risk government backed securities. The government usually offers a much lower value of 'safe debt' to the investors in exchange for the high risk debt. Where investors are faced with a choice of possibly getting nothing back, or the relative safety of government backed securities they will often choose the latter.
The bank which needed help can now book the difference between the original high risk debt value and the value of the government backed securities as an accounting gain thus strengthening it's balance sheet and improving its capital ratio
What to do if you need more help
If you need more help with your specific commercial loan, mortgage or insurance requirement please speak to a professional financial adviser.
We hope you found this information useful.
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