Dividend recapitalisation (dividend recap)

A dividend recapitalisation (dividend recap) involves a company raising new debt to pay an exceptional dividend to its shareholders, without selling the business. It lets a shareholder, often a private equity fund, recover part of its investment while keeping control.

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The transaction increases leverage and therefore financial risk, without improving operating performance. It is appropriate when the company generates stable cash flows and has unused debt capacity, but it reduces the safety margin in a downturn.

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Example: three years after an LBO, a company deleveraged from 3.5x to 1.5x carries out a dividend recap by raising CHF 8.0 million of new debt, paid to the sponsor, bringing leverage back to 3.0x with no change of control.

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At Hectelion, we assess the merits and sustainability of a dividend recapitalisation against the company's repayment capacity.