Retail surgery: Can I suggest a debt-for-equity swap to our bank or would that only work for larger companies?

Debt-for-equity swaps involve the bank swapping some of its loan for an existing class of shares in the company. Alternatively, the bank may wish to take a special class of share, such as preference shares. While smaller companies can do this from a purely legal perspective, the two most important factors will be the company’s profitability and the professional service costs associated with the process.

Barry Doherty, partner in the corporate team at Weightmans LLP, says: “A bank is unlikely to agree to a debt-for-equity swap unless it is satisfied it will ultimately receive a higher return by taking an equity stake.” This would depend on the potential profitability of your company in the future.

Debt-for-equity swaps tend to be utilised in large companies where the company has acquired large historic debts but the bank believes it can be turned around and made profitable. In these cases, the debt-for-equity swap is preferable to administration or liquidation in the bank’s eyes.

However, they can take a long time to negotiate and therefore the costs of professional services from accountants and lawyers tend to be prohibitive for smaller businesses.

Doherty also urges retailers to consider the implications of insolvency if the debt becomes unmanageable. He refers to the Insolvency Act 1986, which can expose directors to personal liability for the company’s debts if contravened.