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In corporate finance, a leveraged recapitalization is a change of the capital structure of the company—usually to substitute debt for equity. Such a maneuver is sometimes called a Leveraged buyout (LBO), but leveraged recapitalization specifically refers to an internal restructuring, while leveraged buyouts are generally made by outside parties such as private equity firms.

Leveraged recapitalizations are used by privately held companies as a means of refinancing, generally to provide returns to the shareholders while not requiring a total sale of the company. These types of recapitalizations can be minor adjustments to the capital structure or may involve a change of control. Carrying debt comes with a lot of advantages in the form of tax benefits and cash discipline as compared to equity. The reduction in equity also makes the firm less able to be acquired in a hostile manner. However, this often leads companies to focus on short-term cash flow projects, and they tend to lose their strategic focus. As shown in the research article: Leverage and Internal Capital Markets [1], the leveraged companies had increased their debt-to-capital ratio from 17% to 50% in a span of 12 years.

See also

References

Downes, John; (2003). Dictionary of Finance and Investment Terms. Barron's. ISBN 0-7641-2209-6.  








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