Debt for equity swap

A debt for equity swap replaces all or part of a financial claim with equity securities of the debtor company. The creditors become shareholders and the debt falls by the amount converted. Under company law, the transaction takes the form of a capital increase paid up by set-off against liquid and payable claims on the company (article L. 225-128 of the French Commercial Code), which the extraordinary general meeting reserves for the creditors concerned (article L. 225-138). In a safeguard, the draft plan provides for conversions of claims into securities giving access to capital when the debtor is a joint stock company (société par actions) (article L. 626-30-2). If the shareholder class votes against, the court imposes the conversion under the conditions of article L. 626-32, when the company reaches the thresholds set by decree, which the law places at a minimum of 150 employees or €20m of revenue. Shareholders keep a preferential right to any cash capital increase provided for in the plan. Atos converted €2.9bn of financial debt into equity in December 2024, through three capital increases reserved for its financial creditors, after the adoption of its accelerated safeguard plan. For the borrower, the negotiation covers the enterprise value used, the issue price of the shares, the dilution of existing shareholders, governance after the transaction and the amount of residual debt the business can repay.

A mid-sized company owes €180m against EBITDA that has fallen to €20m, a leverage of 9x. Its lenders convert €80m of mezzanine and senior debt into 60% of the share capital. The residual debt of €100m brings leverage down to 5x. The historical shareholders keep 40% of the capital.

• The enterprise value used and the issue price of the shares delivered to creditors.
• The share of the capital that existing shareholders keep.
• Governance: board seats, shareholders’ agreement, creditors’ exit rights.
• The level of residual debt compatible with cash flows.