Recapitalisation and Refinancing

Recapitalisation and Refinancing

Presently, European credit markets are going through structural changes leading to a higher level of recapitalisation and refinancing transaction activity. Whether driven by strategic or cost of capital reasons, recapitalisations and refinancings are important tools for corporate growth. There is one form of capital, known as Mezzanine capital, which can effectively play into both recapitalisations and refinancings. Mezzanine capital, due to its low cost relative to equity investment and flexibility relative to bank loans, is a superior way to achieve this type of structural outcome.


Recapitalisation is the reorganization of a company’s capital structure. It 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 notes or loans.

Companies resort to recapitalisations for a number of reasons including exit strategies and tax optimization strategies. It is the financing technique used by companies and management teams to effect a buy-out or share repurchase or to diversify their debt-to-equity ratio to improve liquidity. For instance, a company may use a recapitalisation to issue stock in order to buy back debt securities, thus increasing its proportion of equity capital as compared to its debt capital.

Leveraged recapitalisations occur when a corporation issues notes to raise cash funds and those funds are then used to purchase back shares that have been previously issued.


Refinancing generally refers to replacing an older loan with a new loan that offers better terms. Refinancing involves paying off an existing loan with the proceeds from a new loan, usually of the same size, and using the same assets as collateral. However, to decide if refinancing is worthwhile, the savings in interest must be weighed against the fees associated with refinancing. When a business refinances, it typically extends the maturity date.

The rationale behind using mezzanine financing for recapitalisation and refinancing

Mezzanine financing fills the gap between debt and equity in a number of financial transactions including recapitalisations and refinancings. A mezzanine loan ranks above the shareholders. It takes the place of equity in a capital structure but is far less expensive than equity investment. Using mezzanine for recapitalisation and refinancing enables companies to streamline their existing debt structure and thus reduce the proportion of short-term a mortising debt. In a recapitalisation bid, mezzanine financing can also be used to buy-out minority shareholders or in some cases it may be even used by existing shareholders to achieve liquidity without ceding control.

Companies should always remember that mezzanine providers are not competitors to banks or equity sponsors but rather complement them in a variety of transactions such as expansion, restructuring, and recapitalisations.While some companies find equity investment attractive because it does not require interest payments or principal a mortisation, on the downside, equity involves higher long-term costs, the inability to exit, and management control issues. However, mezzanine financing offers the advantages of a lower cost, no management control, and a predefined exit arrangement.