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Restructuring & Recapitalization

Restructuring

“Restructuring” is defined as the reorganizing of the legal, ownership or operational structures of a business for the purpose of increasing its value by making it more profitable, or better able to withstand or thrive in a particular economic climate.  Companies restructure for any number of reasons. including ownership change, new ownership objectives or dealing with a decline in revenue or increase in certain expenses, such as long term debt interest rates Restructuring is often described as debt restructuring or financial restructuring.

Managers responsible for restructuring usually employ financial and legal advisors to organize and negotiate restructuring options. More often than not, restructuring generally requires renegotiating or refinancing debt, liquidating assets or divisions of the business to outside buyers, and limiting business to those operations which enjoy the best profit margins.

Although many consider restructuring as  a zero-sum game, the ability for lenders to get paid and equity holders to continue to maintain value is often made possible by effective restructuring.  For example, debt can be amortized over a longer period, paying a slightly higher interest rate, but enabling an otherwise struggling company to remain profitable and pay its debt.  Under such an arrangement, the lender gets more than it otherwise would if the company were liquidated and the equity holder is able to continue to receive a return.  Of course, alternative restructuring strategies exist, such as when creditors agree to exchange debt for some portion of equity, but nearly all corporate restructuring is based on the reduction and renegotiation of debt obligations.  This process tries to resolve the difficulties faced by the corporate sector and enables them to become viable again.

While some businesses attempt to restructure without the assistance of legal counsel, doing so can often be a mistake as they do not fully understand their rights and alternative legal strategies, including chapter 11 bankruptcy.  This leads to managers being unaware of their true bargaining strength and financial options.  A competent restructuring attorney can help ensure a company maintains sufficient liquidity to operate during reorganization, produce accurate working capital forecasts, negotiate with creditors who mostly control the company’s ability to raise financing and advise management of their legal options.

Recapitalization

Recapitalization is a type of business reorganization which requires a substantial change in a company’s capital structure whereby a company restructures its debt and equity mixture.  Essentially, the process involves the exchange of one form of financing for another, such as removing preferred shares from the company’s capital structure and replacing them with bonds.

One form of recapitalization is  a leveraged recapitalization.  In a leveraged recapitalization, a business issues bonds to raise money, and uses the newly acquired cash to buy back its own shares. Managers often pursue a leveraged recapitalization to allow certain shareholders to liquidate their equity positions, support stock prices (or raise stock prices), discipline the company by establishing a regular debt obligation which the company must serve or decrease the liquidation value of a company to prevent a hostile takeover.

A second type of recapitalization is a leveraged buyout, which is, simply speaking, a leveraged recapitalization performed by a third party. Usually, incumbent equity holders lose control as the transaction is driven by a third party attempting to get control of the company.  To learn more about leveraged buyouts click here.

To speak with an attorney about recapitalization, reorganization or other corporate and business planning, contact The Callan Law Firm, P.C.