A dividend recapitalization (often referred to as a dividend recap) in finance is a type of leveraged recapitalization in which a payment is made to shareholders. As opposed to a typical dividend which is paid regularly from the company's earnings, a dividend recapitalization occurs when a company raises debt —e.g. by issuing bonds to fund the dividend.[1][2]
These types of recapitalization can be minor adjustments to the capital structure of the company, or can be large changes involving a change in the power structure as well. As with other leveraged transactions, if a firm cannot make its debt payments, meet its loan covenants or rollover its debt it enters financial distress which often leads to bankruptcy. Therefore, the additional debt burden of a leveraged recapitalization makes a firm more vulnerable to unexpected business problems including recessions and financial crises.[3]
Typically a dividend recapitalization will be pursued when the equity investors are seeking to realize value from a private company but do not want to sell their interest in the business.[1][4]
- ^ a b Bristow, Matthew (29 November 2010). "Dividend Recapitalizations: Cash Alternatives for Private Equity". The Journal Record. Retrieved 12 February 2020.
- ^ Stefanova, Mariya (2015). Private Equity Accounting, Investor Reporting, and Beyond: Advanced Guide for Private Equity Managers, Institutional Investors, Investment Professionals, and Students. Upper Saddle River, NJ: FT Press. p. 203. ISBN 978-0-13-376152-8.
- ^ Creswell, Julie; Peter, Lattman (29 September 2010). "DEALBOOK; Private Equity Thrives Again, but Dark Shadows Loom". The New York Times. Retrieved 12 February 2020.
- ^ Pearl, Joshua; Rosenbaum, Joshua (2013) [2009]. Investment Banking: Valuation, Leveraged Buyouts, and Mergers and Acquisitions (Second ed.). Hoboken, NJ: John Wiley & Sons. p. 217. ISBN 978-1-118-72776-8.