In the context of an LBO, what does 'recapitalization' refer to?

• A. Switching from debt to equity financing
• B. Restructuring the capital structure of a company
• C. Selling off assets for liquidity
• D. Going private after a period of public trading

Answer: (B)

Recapitalization in the context of a leveraged buyout (LBO) refers to the process of restructuring the capital structure of a company. In an LBO, investors typically use a significant amount of debt to finance the acquisition of a company, which can lead to a high leverage situation. Recapitalization involves changing the mix of debt and equity in the company's capital structure, which can include issuing new equity, refinancing existing debt, or altering the terms of the debt. This restructuring is often aimed at improving financial stability, optimizing interest payments, or preparing for future growth and investment opportunities.

By adjusting the capital structure, the company can enhance its financial flexibility, manage risks more effectively, and potentially increase shareholder value. Thus, this process is critical in the context of LBOs, as it determines how the acquired company's financial resources are allocated and utilized post-acquisition.