Leveraged Recapitalization

A leveraged recapitalization is a corporate action in which the company replaces the majority, but not all, of its equity with debt. Typically, a company involved in a leveraged recapitalization uses new debt to pay its current shareholders a large one-time dividend. Since management usually holds some ownership in the company but does not participate in the dividend distribution, leveraged recapitalizations tend to substantially increase management’s proportional ownership of the recapitalized firm. The existing asset base is used as collateral against the new debt.