A debt-asset swap (DAS) is a debtor’s transfer to a creditor of third-party receivables, real estate, or other assets to satisfy a debt. Debt-asset swaps frequently occur as debtors look to reduce debt by disposing of noncore assets, such as real estate assets and equity holdings in subsidiaries. Distressed debt has increasingly become an advantageous entry point for real estate-related and equity investments.
A transfer is the conveyance of an asset or group of assets to a party other than the issuer of the underlying financial asset by:
- Selling them to a third party;
- Putting them into a securitization trust; or
- Posting them as collateral.
The purchase of receivables must constitute a true sale in order to insulate the purchaser from the bankruptcy risk of the seller. However, if the risk of nonpayment is retained by the seller, the transfer is a financing – rather than a true sale – and the buyer would be deemed a creditor of the bankrupt seller.
| Accounting by Borrower for a Debt-Asset Swap (Example) | ||||
| RealCo and YourBank do a debt-equity swap on 1 March 2017 whereby real estate with a fair value of €1.6m is exchanged in full settlement of a €2m loan obligation. The real estate has a carrying value of €2.1m on the books of RealCo. | ||||
| 1 Mar 17 | Note Payable to YourBank | 2,000,000 | ||
| Loss on Asset Disposal | 500,000 | |||
| Real Estate | 2,100,000 | |||
| Gain on Restructuring | 400,000 | |||
| To record debt-asset swap by RealCo with YourBank | ||||