All about Recapitalization
Recapitalization is one kind of strategy in order to enhance the financial base of the company’s financial system and structure. It can sort out the rough and messy structure of financial quality and enhance the financial health of a company. Usually, this method can make your capital structure more stable and constant. If you see from a practical angle, then you can understand that money is the capital. It is usually put by owners in order to run the whole enterprise. Recapitalization is a process to make strong your firm and organization. It allows a business to grow in the future.
Different types of recapitalization:
There are four types of recapitalization. These are such as follows:
1. Leveraged recapitalization: In this method, a firm replaces its portion of equity with debt. In this method, you can offer two units of debt against the common stock. In this way, you can change the financial structure of a company. The debt percentage will increase in this way and the equity percentage will reduce as well. In this way, you can restrict the fall of the share price.
2.Leverage buyout: It is a separate term that used for an acquisition of a firm. In this method, the company is buying or borrowing the funds of the third party in order to meet the cost of acquisition. Due to these borrowings, the debt obligation of the particular company will increase. The overall capital structure will change as well. This can give birth to a new way of recapitalization.
3.Equity recapitalization: It is one of the most common forms of all types. In this method, a particular company can raise and increase new funds by authorizing common stocks. This new fund will help the company to buy the debt instrument again. In this way, the debt will reduce and the equity will increase as well. it is a positive sign for a company or firm. The lower debts will ensure the flow of the cash. Higher equity will ensure fewer obligations as well.
4. Capital infusion: This method is done while the national economy will get affected due to bankruptcy and all other issues. In this method, the Government will invest capital in order to buy the potential stock of a company. It is not done for changing the capital structure of a company. Actually, recapitalization is the result of capital infusion.
Now after the types of recapitalization, you should know the reasons behind this.
Various reasons for it:
There are so many reasons behind this. These are such as follows:
Reduce the obligation of debt: Many companies take debt and it actually creates a burden on the company and its liability. This obligation also comes with a regular repayment schedule and structure. As a company head or a financial advisor, you will have to balance the debt structure of a company. It is a balancing act to maintain the debt structure. The company also wants to get rid of this debt obligation as soon as possible. So, in order to get rid of this debt structure, it is an easy method to follow.
Fall of the stock price: the declining effect of the stock price of a company is the main reason behind this. The management of a company will then consider this method in order to reduce the fall of the stock price.
Prevent the competitive takeover: It is also very important to prevent or restrict the competitive takeover by another influential company. In this method, the management will issue some more debts in order to make their company less attractive to the competitive and potential company.
To avoid bankruptcy: It is a tool used by many companies in order to avoid the matter of bankruptcy. It is a re-organizing strategy for a company. This capital structure will reorganize the whole matter and the capital structure of a company. It is an extreme method to avoid it. The inevitability of raise factor will determine the issue of this method.
Increase the capital growth: Capital infusion is a great method to increase the capital growth of a company. The company may go to a capital venture in order to raise the fund through equity and debt.
Interest reduction and tax planning: In many conditions, the company wants to replace the high-interest debt instrument. For example, many companies may issue callable bonds in order to call back the unfavourable interest rates. The company also wants to introduce new debts structures in order to reduce the amount of taxes. This is another reason to recapitalize. It is a pretty good option for a company as well.
In the recapitalize method, the shareholders are willing to extract cash from a company without selling the company and its stocks publicly. They actually do this by levering up the debt portion. They use the borrowed cash in order to pay the shareholders. This can also enable us to pull the future dividends of a company. The borrowed cash will also be distributed to different shareholders in the two following ways. These are such as follows:
Distributing cash through the dividend. Borrowed capital in order to process the buyback method.
This method can also boost up your business. This method can consider some unique strategies in order to build a strong and efficient company. It also makes a company become more professional. This method can fulfill the company’s potentialities.
For the public sector banks, recapitalizing is the main strategy in order to enhance the financial base of a company. it can also increase and ensure financial health as well. With the help of this method, the shareholders or the owners of a firm can make their company strong enough than before. It can also:
The increasing value of bad assets. The bad assets can lead to the erosion of the capital. Expanding the credit needs in order to acquire a higher amount of profit.
It is undoubtedly a supportive measure for any such organization. It is also a reliable option to meet the funds. It is an extremely profitable and helpful method in order to achieve the best and possible outcomes.