Even with the rising interest rates, there is a renewed interest in Recaps or recapitalizations. Simply put, a Recap is the changing of a company’s capital structure, i.e. usually a change in the debt and equity mix.
Different forms of a Recap follow:
- Replacing common stock with preferred shares.
- Removing preferred shares and substituting bonds.
- Replacing part of the equity with debt. If the firm is debt free, the transaction is usually done with a lending instruction.
Why do companies consider or effectuate a Recap? Usually, it is to stabilize the capital structure. However, common share owners use it to remove cash when debt is zero or small and they do not want to exit by selling equity.
The execution of a Recap should be supported by a detailed analysis of the company’s ability to repay the debt. This analysis considers projected profits during the term of the debt.