when a company s debt decreases in proportion to its equity it has less leverage its earnings per share eps should decrease following the change but its shares would be incrementally less risky since the company has fewer debt obligations which require interest payments and return of principal upon maturity without the requirements of debt the company can return more of its profits and cash to shareholders 
reasons to consider recapitalizationseveral factors motivate a company to recapitalize a company may decide to use it as a strategy to defend itself against a hostile takeover the target company s management may decide to issue more debt to make it less attractive to the potential acquirer another reason may be to reduce its financial obligations higher debt levels compared with equity means higher interest payments by trading in debt for equity the company can reduce the level of debt and therefore the amount of interest it pays to its creditors this in turn improves the company s overall financial well being furthermore recapitalization is a viable strategy to help keep share prices from dropping if a company finds that its shares are declining in value it may decide to swap equity for debt to push the stock price back up some companies may also use recapitalization to minimize their tax payments implement an exit strategy for venture capitalists or reorganize themselves during a bankruptcy companies often use this as a way to diversify their debt to equity ratio to improve liquidity types of recapitalizationcompanies can swap debt for equity or vice versa for many reasons an example of equity replacing debt in the capital structure is when a company issues stock to buy back debt securities increasing its proportion of equity capital compared with its debt capital this is called an equity recapitalization debt investors require routine payments and a return of principal upon maturity so a swap of debt for equity helps a company maintain its cash and use the cash generated from operations for business purposes reinvestment or capital returns to equity holders on the other hand a company may issue debt and use the cash to buy back shares or issue dividends effectively recapitalizing the company by increasing the proportion of debt in the capital structure another benefit of taking on more debt is that interest payments are tax deductible while dividends are not by paying interest on debt securities a company can decrease its tax bill and increase the amount of capital returned in total to both debt and equity investors governments may buy back shares to get a controlling interest in a company important to a nation s economy through nationalization another form of recapitalization governments also partake in the mass recapitalization of their countries banking sectors during times of financial crisis and when the solvency and liquidity of banks and the greater financial system come into question for example the u s government recapitalized the country s banking sector with various forms of equity to keep the banks and the financial system solvent and maintain liquidity through the troubled asset relief program tarp in 2008 1