Sealed Air Case
What is a leveraged recapitalization?
A leveraged recapitalization is when a corporation turns to the debt markets to issue bonds and uses the proceeds to buy back shares or distribute equity dividends to investors.
This could be driven by macro-economic factors such as low interest rates on borrowed capital, which makes debt cheaper than equity, thereby making leveraged recapitalization a viable option for companies. Or it could be driven by micro-economic factors such as a need to balance company’s leverage and improve operational efficiency.
As an IB financial advisor what would be the underlying circumstances—given the following end-objectives— that would lead you to consider such a financial transaction to your client—brevity as usual
Underlying circumstances that led to the recapitalization decision by Sealed Air management were: •
The excess free cash flow, which had tempted the managers to waste money on substandard projects. •
Sealed Air did not have good investments or M&A opportunities •
They had sufficient capacity in their plants to meet future demand, without significant additional capital expenditure •
They had been generating sufficient cash flow from operations to ensure sustainable growth
Given these circumstances, I would advise such a transaction only to clients who operate in mature, non-cyclical industry and has poor financial leverage but needs shareholder value creation. This move would be beneficial only to companies that have a history of steady, predictable cash flows and low levels of debt on their balance sheets.
By undertaking a leveraged recapitalization, such a firm can significantly increase its financial leverage. The increased leverage results in higher value for all shareholders as it magnifies operating returns, and therefore benefits by:
1) Monetizing future cash flows and returning that money to shareholders to reinvest; 2) Boosting the firm’s near term earnings growth...
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