Current market conditions require active management of precious capital resources. Banks are faced with pressures to reduce assets at a time of low demand for financial assets, continuing sovereign rating declines and forced revaluation of risk weighted assets, while demand for decisive action to improve capital levels at systemically important financial institutions (Sifis) and to force balance sheets consolidation and NPL resolution has never been greater. In this context debt for equity swaps (DES) are gaining momentum.
Calibrating and executing DES principally employs techniques to reformat capital structures, meaning that DES necessarily impact lenders' rights. This may lead to creditors filing claims seeking to protect their positions by challenging reorganisations of this type, which leads to drawbacks for every party.
Adopting a wider use of DES could help to avoid systemic risks similar to those of Lehman by providing an efficient method of deleveraging financial groups. With this in mind,...