Recapitalisation

Recapitalisation is a term describing a broad range of actions companies undertake – or are forced to undertake – to alter the way they are capitalised. Companies may be required by creditors to improve their debt/equity balance (i.e. deleverage) because they are in breach or may be heading towards breach of their debt covenants. Or they may have fallen into distress and may be required to recapitalise to avoid falling into default or insolvency. In such cases, recapitalisation may take the form of a debt/equity swap, where debt is cancelled and creditors exchange their debt for equity and become shareholders. Or creditors replace their short-term debt for longer-term debt to avoid redemption bottlenecks. Fast-growing companies may have a rapid rate of cash burn to finance accelerated growth and may need to recapitalise to continue their growth trajectory. Leveraged buyouts involve recapitalising a target company’s capital structure with heavy debt levels. In many cases, recapitalisation involves issuing new equity.