What is meant by a distressed debt exchange?

A distressed debt exchange refers to a situation in which a company facing financial difficulties offers new securities—such as bonds or other forms of debt—to its existing creditors in exchange for their current distressed debt. This mechanism allows the company to restructure its balance sheet and potentially reduce the overall debt burden by replacing obligations that may be too costly or unsustainable with new securities that might have better terms, such as lower interest rates or extended maturity dates.

This method is particularly beneficial as it helps to stabilize the company's financial position while providing creditors with an opportunity to recover some value rather than risk a total loss, which might occur if the company undergoes bankruptcy proceedings. The negotiation involved in these exchanges can lead to a more favorable outcome for both parties compared to other alternatives, such as liquidation.

The other options do not accurately describe a distressed debt exchange. Paying off current debts with new equity typically involves common or preferred stock rather than new securities in exchange for existing debt. Instantly converting debt to cash suggests a straightforward transaction that does not reflect the complexities of a distressed debt exchange, which involves negotiation and the issuance of new securities. Releasing long-term investments is unrelated to the context of debt exchanges and focuses more on asset liquidation rather than debt restructuring.