Recapitalization

AAA

DEFINITION of 'Recapitalization'

Restructuring a company's debt and equity mixture, most often with the aim of making a company's capital structure more stable. Essentially, the process involves the exchange of one form of financing for another, such as removing preferred shares from the company's capital structure and replacing them with bonds.

INVESTOPEDIA EXPLAINS 'Recapitalization'

Recapitalization can be undertaken for a number of reasons, such as defending against a hostile takeover, minimizing taxes or to implement an exit strategy for venture capitalists. Companies often want to diversify their debt-to-equity ratio to improve liquidity. A good example is when a company issues stock in order to buy back debt securities, thus increasing its proportion of equity capital as compared to its debt capital.

Generally speaking, when a company's debt decreases in proportion to its equity, it has lower leverage and thus, ceteris paribus, its earnings per share should decrease following the change, however its shares would be incrementally less risky, since the company's shareholders have fewer debt obligations which must be paid by the company before shareholders can see profits.

RELATED TERMS
  1. Earnings Per Share - EPS

    The portion of a company's profit allocated to each outstanding ...
  2. Bond

    A debt investment in which an investor loans money to an entity ...
  3. Preferred Stock

    A class of ownership in a corporation that has a higher claim ...
  4. Buyback

    The repurchase of outstanding shares (repurchase) by a company ...
  5. Capital Structure

    A mix of a company's long-term debt, specific short-term debt, ...
  6. Ceteris Paribus

    Latin phrase that translates approximately to "holding other ...
Related Articles
  1. Fundamental Analysis

    Ratio Analysis Tutorial

  2. Fundamental Analysis

    Using Enterprise Value To Compare Companies

  3. Entrepreneurship

    Finding The Best Buyer For Your Small ...

  4. Options & Futures

    Owners Can Be Deal Killers In M&A

Hot Definitions
  1. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  2. Conduit Issuer

    An organization, usually a government agency, that issues municipal securities to raise capital for revenue-generating projects ...
  3. Financing Entity

    The party in a financing arrangement that provides money, property, or another asset to an intermediate entity or financed ...
  4. Hyperinflation

    Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is ...
  5. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
  6. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
Trading Center