Crest Nicholson in £500m debt-for-equity swap

Here's another good example from late November that I overlooked:

Crest Nicholson is solving its unmanageable debt problem by talking its lenders into a debt-for-equity deal that would cut its borrowings from £1bn to £500m... Its major lenders have agreed to a debt restructuring plan, the result of this being that the level of debt will halve to £500m in exchange for them taking 90% of the equity, leaving management with the remaining 10%.

This is the free market solution to these problems, with no government intervention or taxpayers' money involved. When 'credit' was in abundance, Sir Tom Hunter borrowed a shedload of cash from HBOS* to take Crest Nicholson private, i.e. buy all its shares that were previously quoted on the Stock Exchange. The gamble went wrong but there is still some underlying value to the company's assets, i.e. its land bank (which will probably fall 80% in value, but there will still be something left). HBOS thought it was lending money and Sir Tom thought he was buying shares. Now that the dust has settled, it turns out that HBOS was buying shares and Sir Tom has lost the gamble and ends up with a lot less than he hoped for. A debt-for-equity swap is just the opposite of a leveraged buy-out, in other words.

My point being, debt-for-equity swaps would work just as well for banks. There is no need for anybody to lose money on the transaction, provided bondholders were given shares with a market value equal to the market value of the bonds that are converted. Existing shareholders get diluted down, but they end up with a smaller slice of a more securely funded business, so they needn't end up worse off either. For the taxpayer it's a Big Win, of course, as well as for the wider economy - there'd be no part-nationalised banks and more securely funded banks would, all things being equal, be in a better position to provide finance.

* OK, technically, they formed a 50/50 joint venture.