Recapitalization

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What is Recapitalization?

Recapitalization is restructuring a company's debt and equity mixture, most often with the aim of making a company's capital structure more healthy.

One form is Debt Restructuring: exchanging some of the debt of a company (often in financial distress) by exchanging the debt for new debt with a lower interest rate or with a longer maturity or for common stock or for reorganization bonds. Also financially healthy corporations may use it for tax reasons or other tactics. It can be used as well as an alternative exit strategy for venture capitalists and leveraged buy-out sponsors. Finally it can be used as a defense against hostile takeovers.

Another form is removing preferred shares from the company's capital structure and replacing them with bonds.

The method leads to an improvement of the Working Capital structure of the company. Recapitalizing may seem unfavorable to current creditors, but it may be that if they don't cooperate to recapitalizing the company, they lose all their money in the case of business bankruptcy. Also the Gearing Ratio as well as the Debt to Equity Ratio of the firm improve by recapitalization.

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Compare with: Gearing Ratio  |  Debt to Equity Ratio  |  Accounts Receivable Factoring  |  Restructuring  |  Undercapitalization  |  Turnaround Management  |  Working Capital  |  Sale and Leaseback

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