Adividend recapitalization (often referred to as adividend recap) in finance is a type ofleveraged recapitalization in which a payment is made to shareholders. As opposed to a typicaldividend which is paid regularly from the company's earnings, a dividend recapitalization occurs when a company raises debt —e.g. by issuingbonds to fund the dividend.[1][2]
These types of recapitalization can be minor adjustments to thecapital structure of the company, or can be large changes involving a change in the power structure as well. As with otherleveraged transactions, if a firm cannot make its debt payments, meet itsloan covenants orrollover its debt it entersfinancial distress which often leads tobankruptcy. Therefore, the additional debt burden of a leveraged recapitalization makes a firm more vulnerable to unexpected business problems includingrecessions andfinancial crises.[3]
Typically a dividend recapitalization will be pursued when theequity investors are seeking to realize value from a private company but do not want to sell their interest in the business.[1][4]
Between 2003 and 2007, 188 companies controlled by private equity firms issued more than $75 billion in debt that was used to pay dividends to the buyout firms.[5]
In their relatively brief period of management ofHostess Brands, maker ofTwinkie brand snack cakes and other products,Apollo Global Management andC. Dean Metropoulos and Company added leverage and took a $900 million dividend, "the third largest of 2015" in the private equity industry.[6]
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