Why does this reduce capital, and why does this reduce the company’s ability to pay creditors?
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Let’s say I want to sell shares in a farm (the whole 100% to keep it simple). I can decide how many shares to sell, or how many pieces the ownership will be divided into.
I could divide it into 2 shares, and give my wife one. Or I could divide it into 6 shares, keep 1, give 1 to my wife, and 1 to each of the 4 kids. As the owner you decide (basically) on how much shares to offer.
Say I decide to offer 200 shares for sale that would effectively mean each share get the profit from half arce of land. So people give money to the company and receive a share of the profit.
Let’s say the farm does well and we have huge profits, the owners can decide to buy back the shares in this example they buy back 100 shares. This means they do the opposite of the initial offer, they give money to people (shareholders) and get the shares back. So less shares are now on the market, now the total shares are 100 and each share is of a full acre.
Tldr.
Share buy back is effectivly the opposite of an initial public offering.
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