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Equity Recapitalization The move can benefit companies that have a high debt-to-equity ratio. A high debt-to-equity ratio puts an additional burden on a company, as it must pay interest on its debt securities. Higher debt levels also increase a company's risk level, making it less attractive to investors.
Recapitalization is the restructuring of a company's debt and equity ratio. The purpose of recapitalization is to stabilize a company's capital structure. Some of the reasons a company may consider recapitalization include a drop in its share price, to defend against a hostile takeover, or bankruptcy.
Leveraged recapitalizations have a similar structure to that employed in leveraged buyouts (LBO), to the extent that they significantly increase financial leverage. But unlike LBOs, they may remain publicly traded.
Recapitalization can refer to the creation of common and preferred stock. Preferred stock has dividend and liquidation priority over common stock. In other words, the owner of preferred stock has a greater degree of security than the owner of common stock.
Cons of Majority Recapitalization Here are a few potential drawbacks to keep in mind: Dilution of Ownership: By selling a majority stake, existing shareholders dilute their share of the company's equity into a minority position (or sell entirely), weakening their influence over decision-making.
Leveraged recapitalization, leveraged buyouts, nationalization, and equity recapitalization are various types of recapitalization. One may also use this process as an opening route in private equity.