PROFIT MANAGING BLOG

A debt for equity swap will usually be effected through the issue of new shares in a company to its lenders. These could be either an existing class of shares, or a new class, sometimes with conversion rights into existing shares. The result would be the dilution of existing shareholders to the agreed level.

For non-listed companies, where the number of shareholders is usually small, the issue of new shares to the lenders would be agreed as part of the overall restructuring.

For publicly quoted companies, the issue of new shares is affected by the local stock exchange regulations. In addition, the existing shareholders would normally be offered the opportunity to subscribe for new shares pro rata to their existing holdings to meet their pre-emption rights, where such rights exist. If more than one class of new shares are being issued, these would usually be packaged into ‘units’. Any shares not taken
up by existing shareholders would be subscribed for by lenders in exchange for debt.

Pre-emption can be valuable in negotiations as the shareholders will in effect have the opportunity to avoid dilution by subscribing for the company’s shares on the same terms as those offered to its lenders.

Generally, lenders will be subscribing for shares at a substantial premium to the prevailing market price, principally to recognise the implicit discount in the value of the debt being converted. As a result, it is extremely rare that the existing shareholders will subscribe for shares at the same price as lenders. If an equity fund raising exercise is conducted at the same time as an exchange, non-lender subscribers would be offered shares at a lower price than that being ‘paid’ by the lenders.

Other methods of achieving the desired shareholding by the lenders might be possible, such as:

• Acquisition of the appropriate number of shares from existing shareholders for a
  nominal consideration.
• Deferral or cancellation of the required number of existing shares.

Usually, however, such mechanisms tend to add considerable complexity to the transaction, and are therefore avoided unless there is a particular need to pursue them.

In addition, statutory provisions may also be available to implement a debt for equity swap through the courts. Strictly, however, they fall outside the scope of a ‘voluntary’ loan restructuring.

Legal and regulatory provisions affect debt for equity swaps throughout the transaction and subsequently, until lenders have disposed of their shareholdings. Firstly, there is the need to ensure that the transaction is structured in compliance with all local legal and regulatory provisions. In addition, lenders must ensure that they are not in breach of laws and regulations that apply to them as a result of them being:

• Substantial shareholders in a company.
• Financial institutions holding shares in a non-financial entity.

Laws and regulations relating to the shareholdings held by the lenders in general, and the banks in particular, include:

• Obligations under corporate legislation, or local stock exchange regulation, to disclose acquisitions and movements in shareholdings above a certain threshold.
• The need to comply with local insider dealing legislation.
• In certain circumstances, local and regional mergers regulation may be triggered as a result of the lenders acquiring a substantial shareholding in a company. Dispensation may need to be applied for.
• In some countries there are rules that restrict banks holding shares in non-bank companies. Dispensation is usually available if the shares are acquired to facilitate a rescue.
• Lenders may become a ‘connected party’ with the company and may, as a result, become subject to additional legal and regulatory provisions that govern their dealings with it.

In select circumstances, loans may be canceled if you file a petition for relief under the Bankruptcy Code. Generally, however, bankruptcy doesn’t discharge student loan debt. Discharge. In some circumstances, loans may be canceled if you were unable to complete a course of study because the institution closed or if your loan eligibility was falsely certified. A portion of your loan may also be canceled if the school fails to pay a refund that was due on your loan.

If you pass away before completing repayment, your student loan debt, as well as any PLUS loans your parents took out on your behalf, will be canceled when documentation of your death is submitted to your loan holder.

If something happens that temporarily affects your ability to make payments, contact your loan holder immediately. You may be eligible for a deferment or forbearance.

Deferment

You may postpone repayment if you submit a deferment request to your loan holder with evidence that verifies your eligibility. Upon request, the loan holder will provide a defer¬ment application that lists deferment types and eligibility requirements. You may be eligible for a deferment if you’re:

• Attending an eligible school at least half-time.
• Pursuing a graduate fellowship program or rehabilitation training program approved by the U.S. Department of Education for individuals with disabilities.
• Conscientiously seeking but unable to find full-time employment.
• Suffering economic hardship as defined by federal regulations.

Beginning October 1, 2007, all borrowers who meet the criteria for military deferment are eligible for deferment if they’re serving on active duty during war or other military operation or in a national emergency, including qualifying National Guard duty.

Borrowers who have an outstanding loan balance on at least one loan that was made before July 1, 1993 are eligible for other types of deferment. Visit www.ogslp.org for more information or to download the appropriate deferment form.

Forbearance

If you’re unable to make your scheduled payments but in¬tend to repay your loan, you may request a forbearance to:

• Stop making your loan payments for a short period of time.
• Extend your repayment schedule.
• Make lower payments on your loan for a period of time.

Note: During forbearance, interest charges continue to accrue. The capitalized interest charges add unpaid interest to your principal bal¬ance, increasing both the total amount to be repaid and the monthly payment amount. You have the option to make interest payments to keep your principal balance from increasing due to capitalization.

The monthly repayment amount and time period are determined by your loan amount and schedule of repayment. Loan holders offer four repayment schedules to accommodate your needs.
1. StandardRepayment Schedule
- This plan is the most financially effective way to pay off your student loan while minimizing interest costs.
- Payments are due monthly, excluding periods of deferment or forbearance.
- This schedule has a 10-year repayment term.
2. GraduatedRepayment Schedule
- This plan is ideal if you have limited income but expect to have higher earnings in the future; however, total interest costs are typically higher over the life of the loan.
- Monthly payments are lower at the beginning of the repayment period and increase over time.
- This schedule has a 10-year repayment term.

StaffordLoans - After you graduate or drop to less than half-time enrollment, you’ll receive a six-month grace period before the first loan payment is due.

GradPLUSLoans - Your first payment is due within 60 days after the loan is fully disbursed. You may receive an in-school deferment on your Grad PLUS loan while enrolled at least half-time at an eligible school. For Grad PLUS loans first disbursed on or after July 1, 2008, the post-enrollment deferment permits you to defer your loan for the six-month period immediately following the date on which you ceased to be enrolled at least half-time at an eligible school.

Before the grace period expires on your Stafford loan or before the first payment is due on your Grad PLUS loan, you’ll receive a repayment schedule* which includes:
- Available repayment options.
- Outstanding loan balance.
- Interest

It’s your responsibility as a borrower to repay the total amount of your loan, plus any interest that has accrued. However, there are some programs that allow your student loan debt to be forgiven.

TeacherLoanForgiveness (TLF) Program. All or a portion of your Stafford loan debt may be forgiven if you’re eligible for TLF. You must have received a Federal Stafford loan after October 1, 1998, teach certain high-demand subjects for five consecutive complete years, and meet all other participation re¬quirements. For more information about TLF, visit www.ogslp.org.

Disability. Your student loan debt may be conditionally discharged and later canceled if you become totally and permanently disabled. The appropriate documentation verifying your permanent and total disability must be certified by your doctor and accepted by your loan holder. If your loans are conditionally discharged, they’ll be permanently assigned to the U.S. Department of Education for a three-year period,
beginning on the date your doctor certifies the discharge application, before your debt is completely canceled.

Your loan holder is generally not required to grant a forbearance and may require you to provide rationale for the request in addition to other information. However, your loan holder is required to grant a forbearance in certain circumstances, including if:

• You’re serving in a medical or dental internship or participating in a residency program.
• You receive a national service Education Award under the National and Community Service Trust Act of 1993.
• You’re eligible for the Teacher Loan Forgiveness Program and your cancellation amount will satisfy the anticipated outstanding Stafford loan balance at the time of the expected cancellation.
• You qualify for an economic hardship deferment.