More Debt-For-Equity-Swap Fun

I was trying to track down the numbers on Bank of Ireland's recent debt-for-equity swap, when I stumbled across this from September 2009:

Robert Dyas, the hardware chain, has secured its future after agreeing a debt-for-equity swap that hands a majority stake in the business to its lenders.... The retailer which is based in Leatherhead and was bought by its management earlier this year, has arranged the refinancing agreement in order to more than halve its debt liabilities and radically reduce its annual borrowing costs. Its debts have now been reduced to £15m and annual borrowing costs cut by nearly £2m.

In return Robert Dyas's lenders – Allied Irish and Lloyds Banking Group – have taken a majority stake in the chain. Despite this, they have not got a controlling interest in the retailer in terms of voting rights...

Of course the company did not 'halve its debts' as such, what it did was convert repayable finance (loans) into non-repayable finance (share capital); while its borrowing costs will go down, the amount it will pay out as dividends goes up - it's a legal rather than an economic distinction. Either way, the banks will probably get a lower return on the original loans than they expected.

But the joke is that companies who borrowed recklessly from the bank, are being forced to do debt-for-equity swaps with the bank; and in turn, the banks that lent recklessly have less income to repay their own borrowers and so they too are forced (market forces, y'understand) into debt-equity-swaps with their own lenders and so on.

To complete the circle, let's assume that the man who sold Robert Dyas used the proceeds to buy bonds issued by the same bank that lent the management the money to buy Robert Dyas. The bank ends up owning a large chunk of the shares in Robert Dyas share, and the man ends up owning a large chunk of shares in the bank. So apart from all the income all this generated for investment banks and so on, not much has happened.