What is a Recapitalization?
Recapitalization is when a corporation, motivated by a fall in its share value, implements a financial strategy to change its capital structure. In the event of a fall in share value, a corporation may issue bonds to raise funds and then use those funds to buy back its own shares. This can also be considered a leveraged buyout. Other examples of recapitalization include leveraged recapitalization and nationalization.
Nationalization is when a country, as opposed to a corporation or private individuals, purchases a significant interest in a company thereby acquiring a controlling interest. The corporation is said to become nationalized since it now falls under the control of a nation.
A leveraged recapitalization is when a corporation issues bonds as an instrument to raise cash funds. Those funds are then used to purchase back shares that have been previously issued in an attempt to reduce the amount of equity in the company. The reason for applying such a strategy may be to help boost the company’s stock value in the event of a weak market or to simply take advantage of low stock prices and thereby reserve those stocks for future capital requirements.
Mezzanine debt is a common source of capital for companies that wish to undergo a recapitalization.