Leveraged Recapitalization

A leveraged recapitalization involves borrowing to finance a transfer of ownership or the distribution of a large cash dividend among the current shareholders. It can facilitate a change of control where the current majority shareholder is cashed out completely. Mezzanine debt providers and private equity investors are the common initiators of this type of transaction.  Leveraged recapitalization is most associated with an intermediate liquidity event by a founder where a lender funds a dividend cash-out.  Many founders want liquidity but are unwilling to sell control unless they are cashing out 100%. A leverage recapitalization allows them to receive liquidity through borrowing to fund a dividend without ceding control.  The founder remains the controlling shareholder after the leveraged recapitalization and continues to lead the company until a full exit event.  This type of structure requires a supportive lender who bases their loan structure on the market enterprise value of the company.  Unlike an acquisition or growth financing where loan proceeds are invested in the business, all the leveraged recapitalization loan proceeds leave the balance sheet at closing. Transaction feasibility is therefore dependent on the company having a strong enterprise value that far exceeds loan size.  Leveraged recapitalization lenders will lend up to 3.5 to 4.5 times adjusted EBITDA for a loan priced at 12% with an equity warrant usually less than 5%.  Only high-quality companies can attract a leveraged recapitalization lender due to the structural and credit sensitivities of the deal.  A lender needs strong conviction as to the continued greatness of the company to be willing to fund a large distribution to the founder.