recapitalization business definition
A change a company makes in the long-term financing mix it uses. For example, a firm may borrow long-term funds (that is, it may sell bonds) in order to acquire the money needed to repurchase a block of its outstanding stock. Because recapitalization will often affect the level and the volatility of earnings per share, it is of interest to stockholders. Recapitalization often occurs when a firm attempts to reorganize while in bankruptcy proceedings. See also
dividend recapitalization.
Hospital operator Health Management Associates announced in early 2007 that it would undertake a corporate recapitalization by issuing $2.4 billion in new debt in order to raise funds that would be used to pay its common stockholders a one-time dividend of $10 per share. The dividend would represent a nearly 50% return on the stock, which was selling for approximately $21 per share. The recapitalization was designed to fend off private equity firms that often utilize debt to finance the acquisition of a target company's shares. Companies that already have substantial amounts of debt are much less likely to be subject to an unwelcome takeover attempt. The recapitalization by Health Management Associates was able to take advantage of favorable interest rates, but it resulted in a substantial drop in the firm's credit rating. Recapitalizations often work to the advantage of shareholders and the disadvantage of creditors.
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