Recapitalization

Companies recapitalize for different reasons. A leveraged recapitalization involves taking on new debt and using the proceeds to pay a special dividend or buy back shares. This returns cash to shareholders and increases leverage. Private equity owners sometimes use a similar move, called a dividend recapitalization, to take money out of a company before selling it.

For example, a private equity-owned company with debt of 100,000,000 might borrow an additional 150,000,000 and pay it to its owners as a dividend.

Conversely, a company with too much debt might recapitalize by issuing new shares or converting debt into equity, reducing leverage and the risk of financial distress. This is common in restructurings.

Recapitalizations can also be used defensively, for example to make a company less attractive to a hostile bidder. The effects depend on the direction: adding debt increases financial risk and potential returns to shareholders, while reducing debt lowers risk.