Recapitalization is a type of corporate reorganization involving substantial change in a company's

capital structure In corporate finance, capital structure refers to the mix of various forms of external funds, known as capital, used to finance a business. It consists of shareholders' equity, debt (borrowed funds), and preferred stock, and is detailed in the ...

. Recapitalization may be motivated by a number of reasons. Usually, the large part of equity is replaced with debt or vice versa. In more complicated transactions,

mezzanine financing In finance, mezzanine capital is any subordinated debt or preferred equity instrument that represents a claim on a company's assets which is senior only to that of the common shares. Mezzanine financings can be structured either as debt (typicall ...

and other hybrid securities are involved.

Leveraged recapitalization

One example of recapitalization is a

leveraged recapitalization In corporate finance, a leveraged recapitalization is a change of the company's capital structure, usually substitution of debt for equity. Overview Such recapitalizations are executed via issuing bonds to raise money and using the proceeds to bu ...

in which the company issues bonds to raise money and then buys back its own shares. Usually, current shareholders retain control. The reasons for such a recapitalization include: * Desire of current shareholders to partially exit the investment * Providing support of falling share price * Disciplining the company that has excessive cash * Protection from a hostile takeover * Rebalancing positions within a holding company * Help to improve the stock of the company during a time of poor economic conditions

Leveraged buyout

Another example is a

leveraged buyout A leveraged buyout (LBO) is one company's acquisition of another company using a significant amount of borrowed money (leverage) to meet the cost of acquisition. The assets of the company being acquired are often used as collateral for the loan ...

, essentially a leveraged recapitalization initiated by an outside party. Usually, incumbent equityholders cede control. The reasons for this transaction may include: * Getting control over the company via a friendly or

hostile takeover In business, a takeover is the purchase of one company (the ''target'') by another (the ''acquirer'' or ''bidder''). In the UK, the term refers to the acquisition of a public company whose shares are listed on a stock exchange, in contrast to ...

* Disciplining the company with excessive cash * Creating shareholder value via gradual debt repayment

Nationalization

Another example is a

nationalization Nationalization (nationalisation in British English) is the process of transforming privately-owned assets into public assets by bringing them under the public ownership of a national government or state. Nationalization usually refers to pri ...

in which the nation in which the company is headquartered buys sufficient shares of the company to obtain a

controlling interest A controlling interest is an ownership interest in a corporation with enough voting stock shares to prevail in any stockholders' motion. A majority of voting shares (over 50%) is always a controlling interest. When a party holds less than the majo ...

. Usually, incumbent equity-holders lose control. The reasons for nationalization may include: * Saving a very valuable company from bankruptcy * Confiscation of assets * Executing

eminent domain Eminent domain (United States, Philippines), land acquisition (India, Malaysia, Singapore), compulsory purchase/acquisition (Australia, New Zealand, Ireland, United Kingdom), resumption (Hong Kong, Uganda), resumption/compulsory acquisition (Austr ...

Nationalisation Is essentially a move by the nation of the company to acquire controlling interest in the company, either through buying majority shares with a motive to: 1) eliminate dominance of the shareholders. 2) Own controlling interest in the company It can also be an attempt by the national government to rehabilitate its position financially by issuing bonds to increase public debt and meet immediate liabilities.

References

Financial capital {{econ-term-stub