What is Recapitalization?
Recapitalization is a term used to denote some sort of legal reorientation of the company’s capital structure. There may be a variety of reasons because of which the recapitalization takes place. Mainly it is denoted as a procedure by which a large part of the equity is converted into debt and also a large part of the debt is converted into equity. If you go into complex transactions, it involves a lot of procedure including mezzanine financing and mortgaging other forms of hybrid securities. Recapitalization is mainly done for a variety of reasons. It is usually done to minimize the taxes, to defend against some takeover which has gone against the company or it may be used by venture capitalists for improving their business strategy.
Kinds of Recapitalization
1) Leveraged Recapitalization
When a company wants to take its business for leveraged recapitalization it is more prone to issue bonds to generate money and buy the shares of the company itself from the market. The main reasons behind a leveraged recapitalization will want the present shareholders to exit the investment they have made to the company and also to decrease the steep falling prices of the company’s shares. Other reasons might be the presence of excessive cash within the company and providing a balance inside the company to an devastating turnover.
This is another form of leveraged recapitalization when an outside party buys the shares of the company. The reasons of doing this might be of a similar nature like putting excessive cash within the company and gaining control of the company in a hostile way. Another reason might be to create a shareholder value by means of a debt repayment method.
It is also the opposite side of the same coin. It happens when the government of the nation in which the company operates buys a considerable amount of shares of the company. It is possible due to a mixture of reasons. The nation may want the company to be saved from bankruptcy or it might want to confiscate the rights of the company. It might even want to show its power in the financial market.