What is deleveraging?
Deleveraging occurs when an individual or company tries to decrease its total financial leverage. The most common form of deleveraging, whether by an individual or a company, is to pay off as many or all of its debts. If it cannot do this, then it is vulnerable to default.
Where have you heard about deleveraging?
It is very common for a business to use leverage – getting into a certain amount of debt in an attempt to grow the company. However, if the leverage does not help to achieve further growth, the company may see fit to delever and pay off all existing debts.
What you need to know about deleveraging.
Deleveraging is practiced with the aim of minimising the percentage on an entities balance sheet, which is funded by liabilities. There are two ways of doing this. Firstly, an individual or company can make enough money through business and use the excess cash to pay off debts and thus eliminate liabilities. The second way is through the sale of existing assets. Equipment, real estate, bonds etc can be sold and the money from them can be used to pay off the debts. Deleveraging can be a cause of concern for investors as it implies that the company is not growing.
Find out more about deleveraging.
If you want to find out more about deleveraging, see our page on financial leverage.