What is a Leveraged Recapitalization?
When a company uses debt financing to fund a cash distribution / dividend to shareholders.
By taking on debt (“leverage”) to fund a payout to equity holders, the transaction results in a change in the company’s capital structure – its mix of equity and debt financing – or a “re-capitalization” of the business. Sometimes shortened to “leveraged recap” or “dividend recap”.
A leveraged recap provides a means for shareholders to capitalize on the equity value of their company while retaining equity ownership.
Example Scenarios
Partner buy-out: a company obtains debt financing to fund the buy-out of an existing partner / shareholder, consolidating equity ownership among remaining shareholders.
Shareholder dividend: a company obtains debt financing to fund a dividend payment to existing shareholders, allowing owners to “take some money off the table”.
How Does it Work?
1. The company (borrower) obtains new debt financing and uses the proceeds to fund a cash distribution to shareholders.
2. Debt financing is held on the company’s balance sheet and is serviced/repaid (with interest) using the company’s cash flows.
Considerations
Borrowing capacity: the amount of financing available (and distribution size) will be influenced by the company’s cash flow generation and ability to service/repay the debt on time and without disrupting the business. Historical cash flow levels, variability and projected performance will be key considerations.
Post-close incentives: the amount of financing available will also be influenced by the distribution size compared to owners’ dollars and/or “sweat equity” invested and the implications of a payout on leadership’s incentives post-close.
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