COVID-19 #2 Debt-equity swap to restore your equity position


In the context of the economic downturn caused by the corona crisis, companies may seek for (different) ways to restore their equity position. Previously, we explored intragroup debt waivers as a remedy to alleviate financial distress (click here).

Another approach that may be considered is the contribution in kind of existing intercompany (or third party) receivables. Although most of these debt-equity swaps are performed by the parent company or another group company of the debtor, it is also possible that such a debt-equity swap is undertaken by third party lenders. In the latter event however, the debt-equity swap is likely to have an immense impact on the shareholder structure of the debtor and is therefore often a measure of last resort. Below, we focus on some attention points related to group internal debt-equity swaps.

Item #2: Debt-equity swap – caution for companies in financial distress

As we are talking about related party transactions, the quantum of new shares issued in return for the contribution (‘exchange ratio’) should be at arm’s length. This, in order to circumvent that the debtor company would be deemed to grant or receive abnormal or gratuitous advantages to the creditor (or vice versa). In view of avoiding lengthy discussion with the tax authorities (which are often loaded with hindsight), a robust valuation of both the debtor company and the receivable are strongly recommended.

The determination of the exchange ratio is a delicate exercise when the debtor company is in financial distress and especially if it has a negative market value. Under these circumstances, the market value of the receivable is often lower than its nominal (or face) value. Several questions emerge: should the receivable be contributed at nominal value or the (lower) market value? Can parties freely determine between both options? And if so, is there any symmetry required between the approach taken by the debtor company and the creditor company?

From a debtor’s perspective, it is preferred to convert the debt at nominal value, as otherwise the transaction does not or not sufficiently restore the equity. Furthermore, a conversion at fair value would lead to taxable revenue that may not be fully compensated with available tax attributes (i.e. carried forward tax losses or other tax deductions, which can in the current state of the law be set-off only to a limited extent). On the other hand, for the creditor company a debt-equity swap at nominal value may prove inefficient from a tax perspective as an impairment on the shares it received in return for the contribution may ultimately not be tax deductible (as opposed to the capital loss on the receivable upon a contribution at fair value).

Considering that the Belgian Accounting Standards Committee, Belgian courts (up to the Supreme Court), the ruling office and numerous legal commentators all had their – discordant – say on this topic, it is difficult navigating through this muddy water without seeking professional advice.

Should you have any questions in this respect, please contact us.


While most companies have applied for the COVID measures available by now, we see that quite some groups struggle to monitor closely their short-term (and certainly mid-term) cash position and how to manage and optimise it further to steer their company through this crisis in the best way possible. We meanwhile have created the following email platform: in order to give you a sounding board in these challenging times.