Debt for debt exchange means the exchange of an existing debt with a new debt by the debtor. An existing debt can be exchanged even by combining debt and equity securities. A debt for debt exchange procedure benefits both the creditor and the debtor. A debt exchange procedure is a good substitute for refinancing procedure.
A debt exchange procedure provides the following advantages:
- it provides the creditor with a lower face amount of debt;
- it provides the creditor with an opportunity to change the terms and conditions of the outstanding debt;
- it also provides a long and extended term for maturity of the debt;
- it helps a creditor, who is facing an uncertainty as to the cash flows, by giving the creditor an opportunity to restructure the balance sheets; and
- it helps the debtor to make his/her debt a new one without paying cash except for the professional fees and transaction costs.
For the purpose of debt exchange, it is assumed a debtor has satisfied the old debt with an amount of money equal to the new debt instrument’s issue price. A debtor who makes a debt exchange will get a Cancellation of Debt (COD) income. This COD income is actually the aggregate of the old debt’s issue price and the new debt’s issue price. The issue price of the new and the old debt are calculated according to the Original Issue Discount (ODI) Rules.