What Does Debt Recapitalization Mean?
Debt recapitalization allows the owners or key employees in a company to take money out of the company and then confer the risk of this loan onto other classes of assets in the company. This type of financing provides an immediate infusion of cash into the business that the owners can use for any purpose that they desire. The lending company therefore provides a quick infusion of debt capital to the borrowing company in the form of mezzanine or senior capital financing in order to accommodate a net distribution of cash to the owners of the business.
Divestopedia Explains Debt Recapitalization
In most types of debt recapitalizations, one or more of the company owners simply goes to the bank and asks for a loan based on the company’s financials. The bank will look at the company’s cash flow, balance sheet and its ability to meet future expenses and then make a loan based upon these factors. This type of debt could be made through various types of financial mechanisms, such as dividends or other similar types of payments. The amount of money that is ultimately borrowed will depend upon various factors, such as the company’s cash flow and balance sheet and its ability to pay future financial obligations.
There are several advantages to using this type of debt financing, including:
The owner (or owners) of the business will retain full ownership of the company.
The entire procedure is fairly fast. The owner(s) only need to negotiate with the bank for their money.
Debt restructuring is often done on a confidential basis, thus preventing any major disruption in the operations of the company.
Some of the disadvantages that this approach include:
Most banks or other primary lenders will require some sort of personal guarantee in addition to the corporate promises made by the owners. Owners therefore need to objectively evaluate whether they can take this additional risk with their business.
Both senior debt and mezzanine providers will be burdened with additional reporting requirements.
Further debt that is taken out on the business will correspondingly increase the burden on its cash flow, which can make it more difficult to secure additional financing of any kind in the future. This can thus impact the company’s ability to grow in the future.