Recapitalization
A restructuring of a company's capital mix by altering the balance of debt and equity on its balance sheet.
What is Recapitalization?
Recapitalization is a corporate restructuring that changes a company's capital structure—the mix of debt and equity financing—without necessarily altering its underlying operations. In a leveraged recapitalization, a company issues new debt to repurchase shares, returning cash to shareholders while increasing financial leverage and capturing interest tax deductions. This can boost earnings per share and return on equity while sometimes creating a takeover defense by loading the balance sheet with debt. In a distressed recapitalization, equity is issued or debt is converted to equity to reduce obligations and restore solvency. Equity recapitalizations—issuing new shares to pay down debt—reduce leverage and improve credit metrics, often used following a period of financial distress or ahead of a ratings-sensitive transaction.
Example
In February 2013, Dell Inc. underwent a leveraged recapitalization as the core mechanism of its $24.9 billion going-private transaction, in which Michael Dell and private equity firm Silver Lake Partners added approximately $15 billion in new bank and bond financing to fund the buyout. The transaction converted Dell from a publicly traded, low-leverage company into a private, highly leveraged entity, allowing management to invest in a long-term transformation without the quarterly earnings pressures of a public company.