What Does Recapitalization Mean?
Recapitalization is a financial strategy used by a company to change its financial structure in order to weather through a rough financial situation or to help improve the company's financial stability. It is usually done by altering the debt/equity ratio of the company to increase either the contribution of debt or equity to the overall capital of the company.
Divestopedia Explains Recapitalization
Recapitalization strategy is mostly used when the shares of a company fall drastically. To make up for this loss, the company issues bonds and uses the money from those bonds to buy back its own shares. When more shares are bought, the price goes up due to the forces of supply and demand. This move can also be a way to take advantage of the low market price of shares to increase the company's reserves so that it can be used to meet future capital requirements.
Sometimes, a recapitalization strategy is used to make the capital structure of a company more stable. If a company believes that its existing equity and debt ratio is proving to be a problem, then recapitalization is a way to get to the right ratio. For example, if a company has a 70:30 ratio of debt to equity, then there is a financial burden on the company since it must finance the debt and make interest payments on it. To reduce this financial burden, the company can buy more of its shares from the stock market until the capital structure reaches 50:50, which is a more comfortable debt to equity ratio.
In other situations, companies may want to reduce their equity and take on more debt as a way to make the company less attractive for a hostile takeover bid. When a company is saddled with debt, it will look less attractive to potential acquirers. To achieve this objective, the company will issue new bonds to alter its capital structure.
Finally, recapitalization may be used as part of a reorganization strategy if a company is facing bankruptcy.