Recapitalization

Recapitalization is a type of corporate reorganization involving substantial change in a company's capital structure. Recapitalization may be motivated by a number of reasons. Usually, the large part of equity is replaced with debt or vice versa. In more complicated transactions, mezzanine financing and other hybrid securities are involved.

Types of Recapitalization

Leveraged Recapitalization

One example of recapitalization is a leveraged recapitalization, wherein the company issues bonds to raise money, and then buys back its own shares. Usually, current shareholders retain control. The reasons for this sort of recapitalization include:

• Desire of current shareholders to partially exit the investment
• Providing support of falling shareprice
• Disciplining the company that has excessive cash
• Protection from a hostile takeover
• Rebalancing positions within a holding company
• Help to improve the stock of the company during a time of poor economic marker^[1]

Leveraged Buyout

Another example is a leveraged buyout, essentially a leveraged recapitalization initiated by an outside party. Usually, incumbent equityholders cede control. The reasons for this transaction may include:

• Getting control over the company via a friendly or hostile takeover
• Disciplining the company with excessive cash
• Creating shareholder value via gradual debt repayment

Nationalization

Another example is a nationalization, wherein the nation in which the company is headquartered buys sufficient shares of the company to obtain a controlling interest. Usually, incumbent equityholders lose control. The reasons for nationalization may include:

• Saving a very valuable company from bankruptcy
• Confiscation of assets
• Executing the eminent domain right

See also

• Bailout

References

Corporate finance and investment banking Capital structure Convertible debt Exchangeable debt Mezzanine debt Pari passu Preferred equity Second lien debt Senior debt Senior secured debt Shareholder loan Stock Subordinated debt Warrant Transactions (terms / conditions) Equity offerings At-the-market offering Book building Bookrunner Corporate spin-off Equity carve-out Follow-on offering Greenshoe Reverse Initial public offering Private placement Public offering Rights issue Seasoned equity offering Secondary market offering Underwriting Mergers and acquisitions Buy side Control premium Demerger Divestment Drag-along right Management due diligence Managerial entrenchment Minority discount Pitch book Pre-emption right Proxy fight Post-merger integration Sell side Shareholder rights plan Special situation Squeeze out Staggered board of directors Stock swap Super-majority amendment Tag-along right Takeover Reverse Tender offer Leverage Debt restructuring Debtor-in-possession financing Financial sponsor Leveraged buyout Leveraged recapitalization High-yield debt Private equity Project finance Valuation Accretion/dilution analysis Adjusted present value Associate company Business valuation Conglomerate discount Cost of capital Weighted average Discounted cash flow Economic Value Added Enterprise value Fairness opinion Financial modeling Free cash flow Free cash flow to equity Market value added Minority interest Modigliani–Miller theorem Net present value Pure play Real options Residual income Stock valuation Sum-of-the-parts analysis Tax shield Terminal value Valuation using multiples List of investment banks Outline of finance