Restructuring a company’s debt and equity. A process generally utilized in order to reinforce the stability of its capital structure, usually by exchanging two distinct forms of financing (e.g., removing preferred shares from the capital structure in favor of bonds).
When a company desires, for whatever reason(s), to overhaul its financial structure or strengthen the stability of its financial situation, it may choose to embrace the process of recapitalization. Financial stability concerns may be of particular concern if stock prices are falling or financial obligations are becoming burdensome. Financial overhaul may become a priority in the event of bankruptcy or a hostile takeover attempt.
In order to successfully recapitalize, a company must significantly alter its debt to equity ratio. Depending on what makes sense under the circumstances, a company may choose to add either more equity or more debt to its existing capital.
Executive: “Did you hear that we are at risk of a hostile takeover from that clothing company based in Houston?”
Accountant: “No, but I write up some thoughts about how we might recapitalize in order to better insulate ourselves from takeover.”
Executive: “Yes, yes, that’s all good. OR we could fly to Houston and steal all of their oversized hats and leather boots!”