Leveraged recapitalization

One of our VC-A Members raised recently €270 million to provide debt solutions to the mid-market in Europe. Although his alternative source of funding claims to be more flexible that most lenders and is offering leveraged recapitalization, I suspect that he is looking for interests rates in the 7-8% range, which is currently much higher than what traditional ECB-backed banks are offering.

For example, CaixaBank in Spain is currently offering to healthy companies, debt at 2%-3% annual interest rates. Companies in special situations or new projects still struggle to raise funding and could be interested but our VC-A member wants to focus on companies with EBITDA in excess of €5 million.

Then, why would a sound company accept debt at 2-3 times the price of the market?

One possible  reason is Leveraged Recapitalization.

What is Leveraged Recapitalization?

Leveraged Recapitalization is a corporate strategy in which a company takes on significant additional debt with the intention of paying a large cash dividend to shareholders and/or repurchasing its own stock shares. A leveraged recapitalization strategy typically involves the sale of equity and the borrowing or refinancing of debt.

Dividend Recapitalisation
Dividend Recapitalization

Why leverage a company to recapitalize it?

I will discuss here 3 reasons why shareholders may want to execute a leveraged recapitalization:

  1. To repel sharks
  2. To re-invest the proceed of the dividends into another business
  3. To enjoy life now rather than in the future

1- Shark repellent strategy

By leveraging the company, it becomes less an attractive target for potential hostile take-overs. It is comparable to a poison pill to repel unwanted and/or unsolicited buyers.

2- Re-investment

This strategy may suit  Venture Capitalists (VC) or Private Equity (PE)’s objective, which is to maximise the profile of their companies portfolio.

If a VC/PE believes that the return on investment (ROI) from another asset will offset the additional cost of debt servicing, it may make sense to weaken one balance sheet in favour of the consolidated picture.

3- Enjoy life

Imagine that you own part or the totality of a healthy company and want some cash to fulfil your short term desires – or your partner’s desires 🙂 – but don’t want to sell your equity. One solution is a dividend recapitalization.

Why look for alternative sources of funding?

If you have decided yourself for a leveraged recap, you may now ask yourself, why paying an extra cost of debt servicing instead of getting a loan from a traditional bank?

The answer is simple:

 your traditionnal banker is upset with your anti-takeover strategy,  finds your re-investment strategy suspicious and is definitively against your enjoying life (his own life is miserable).

Conclusion, once you have been turned down by your banker, if you still want to refinance your debt, give me a call…


Other recent Thought Leadership articles by Mr. Christophe Schwoertzig:

Strategy Definition versus Strategic Planning 

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