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.

BREAKING DOWN '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.

  1. Liquidity

    The degree to which an asset or security can be quickly bought ...
  2. Balance Sheet

    A financial statement that summarizes a company's assets, liabilities ...
  3. Preferred Stock

    A class of ownership in a corporation that has a higher claim ...
  4. Debt/Equity Ratio

    Debt/Equity Ratio is debt ratio used to measure a company's financial ...
  5. Bond

    A debt investment in which an investor loans money to an entity ...
  6. Earnings Per Share - EPS

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