Question

what are the possible downsides of leverage recapitalization

Answer 1

Disadvantages of leverage recapitalization:

1) Recapitalization with debt can be very helpful for firm to increase productivity of capital but high level of debt can put a firm in the risk of defaulting. It create liquidation risk on firm.

2) High debt in capital structure put pressure on firm to give interest to the creditors otherwise creditors will put legal pressure on firm. Here, company has to bear high financial risk.

3) For Debt recapitalization company has to maintain stable income so that it can repay interest and invested amount. So, Its not suitable for non stable company.

4) Company has to invest more on fixed assets otherwise without security debt recapitalization has high risk.

5) If company debt level is high with recapitalization. It stops company from taking loan further.