Undercapitalization

finance a la shmoop what is recapitalisation all right people think

nee capitalization you know in Jersey like when you owe the mob money at least [thug breaks knee with bat]

that's what it feels like if you're a common equity stockholder of a company [businessman with common stock]

that has been recapped well usually recapitalisation is a very kindly loving

politically correct term for a 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 buy so 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 and eventually the

company burned through eighty seven million dollars and it has just a [dollars on fire]

million bucks left in the bank and it built something out of that eighty seven [company logo graveyard]

million not quite worth putting here yeah but it might be worthy of a new

investment of say yo thirty million or more dollars but the marketplace values [money going into company briefcase]

this zombie company yes that's what they're called at a [zombie briefcase walking at night]

value well less than the eighty seven million that has been raised previously

so everything is marked down usually with a common in total being worth [store during closing sale]

something like one percent of the new company and that's oh so sad for the

founders because it was a hundred percent of the company the day they

started so they were recapped and lest more mature companies feel left out well

recapitalisation happens in later stage companies as well and the radio industry

famously took on too much debt in the late 1990s and then people stop [radio knob getting changed]

listening to Drivetime radio as cell phones and satellite radio intruded I

bring radio borrowed five billion dollars at seven percent to oh three

hundred fifty million a year and then when cash earnings fell well below that

number while the company had to recap its five 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 and it'll likely [goat getting milked]

be a very low interest rate or a low return on their and

if a positive one at all hopefully that all made sense you the first time though

because well we don't have time here in this video for a recap