Recapitalization

Think: knee-cap-italization in Jersey. Like when you owe the mob money. At least that’s what it feels like if you’re a common equity holder of a company that has been recapped.

Usually recapitalization is a very kindly, loving politically correct term for “Hey pal, you’re bankrupt. You borrowed money you promised to pay back. And you didn’t. So now you’re out. And the lenders now own your company. Buh...and Bye.”

So a typical recap comes from a company that was very early stage and had preferred stock upon preferred stock from venture capital investors sitting above their common in the priority stack. Eventually the company burned through 87 million dollars. It has just 1 million left in the bank and it built something out of that 87 million not quite worth putting here:

It may be worthy of new investment of, say, 30 million more dollars. But the marketplace values this zombie company at a value well less than the 87 million that had been raised previously. So everything is marked down, usually with the common in total being worth something like 1 percent of the new company and that’s oh so sad for the founders, because it was 100 pct of the company the day they started it.

So they were recapped.

And lest more mature companies feel left out, recapitalization happens in later stage companies as well. The radio industry famously took on too much debt. And then people stopped listening to drive-time radio, as cell phones and satellite radio intruded.

I Brain Radio borrowed, say 5 billion dollars at 7% to owe 350 million a year. When cash earnings fell well below that number, the company had to recap its 5 billion of debt...such that those debt holders now own essentially all of I Brain Radio and hope to someday milk enough cash out of it to get their principal back, knowing it’ll likely be at a very low interest rate, if a positive one at all.

Hopefully that all made sense to you the first time through because, uh, we don’t have time for a...recap.