To deleverage means to reduce the amount of debt that a company carries, usually by taking major steps quickly. It is the opposit🔯e of leverage, which refers to taking on debt to fund business goals.

Deleveraging is a term that comes to the forefront during and after times of economic turmoil, whether that's a downturn, an all-out recession, or a depression. It ca♓n also occur due to company mismanagement.

It applies to businesses (and people) that try to clean up their balance sheets by reducing their debt. Thus, it can be very useful and important to U.S. corporations. Governments can also become involved in deleve🐼raging.

What el🍒se does deleveraging mean to corpora💜te America? To explain, it helps to start with leverage.

What Is Leverage?

Leverage has become an integral aspect of our ♏society. The term refers to borrowing money a🥂nd using it to increase the possibility of a return.

Businesses use leverage to finance their operations, fund expansions, and pay for 澳洲幸运5开奖号码历史查询:research and development (R&D).

By borrowing money to obtain capital rather than issuing more stock, businesses can pay their bills without diluting shareholders' equity.

For example, if a company formed with an investment of $5 million from 澳洲幸运5开奖号码历史查询:investors, the equity🅰 in the company is $5 million. This is money the compan🃏y uses to operate.

If the company then borrows $20 million, the company now has $25 million to use as needed. It could invest in 澳洲幸运5开奖号码历史查询:capital budgeting projects and other opportunities to increase value for thꦉe fixed numbe🐟r of shareholders.

Operating and Financial Leverage

There are two main types of leverage: 澳洲幸运5开奖号码历史查询:operating leverage and financial leverage. Operating♐ and financial leverage make income and profits more sensitive to business cycles.

This can be a good thing during periods of economic expansion and a bad thing during economic contraction. That's because leverage equals debt which equals interest payments.

Interest payments c𝐆an be handled well during healthy economic periods. But if the economy weakens and a company makes less r🔴evenue, interest payments owed to creditors could be hard to make.

What Is Deleveraging?

The old adage "everything in moderation" applies perfectly to the concept of leverage.

If companies incur too much leverage, or debt, they can run into trouble because of the excessive interest payments they face. That's when deleveraging—getting rid of debt—comes into play.

Deleveraging occurs when a firm executes a🃏 strategy to pay off any or all existing debts.

To deleverage, a company can raise capital that it then uses to wipe off the debt from its 澳洲幸运5开奖号码历史查询:balance sheet. Or it can sell assets to raise the money. It can also reduce its spending and apply the savings to its debt. But, as not𒁃ed below, reducing spending may𒅌 entail difficult choices and affect the lives of employees.

However, without deleverag﷽ing, an entity could default on its debt, as the financial burden may 𒐪become unbearable.

Pros and Cons

For businesses, deleveraging has positive and nega✅tive aspe🍸cts. On the one hand, deleveraging strengthens balance sheets by removing liabilities. And it can improve the financial ratios that investors use to gauge the financial health of a company.

Also, lenders will like what they see and be more likely to lend to the deleꦍveraged compꦡany in the future.

It is a sou♉nd course of action to get a company back on track toward growth without owing too much money, if any.

On the other hand, deleveraging isn't always pretty. To pay off its debt, a company needs extra cash. So it may have to lay off workers, close plants, slash R&D budgets, and sell assets. It may have t𒉰o sell some part of𒈔 its business at a less than optimal price.

Investors can become concerned about a company that failed to achieve enough growth to pay what it owed. And such efforts could affect the price of a company's stock.

Wall Street's Response to Deleveraging

Wall Street generally greet🌺s successful deleveraging with a warm embrace. Announcements of massive layoffs can send corporateᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚ costs falling and share prices rising.

However, deleveraging doesn't always go as planned. When the need to raise capital to reduce debt levels forces firms to sell off assets they don't wish to sell at 澳洲幸运5开奖号码历史查询:fire sale prices, the price of a company's sh♑ares generally suffers in the ❀short run.

In addition, when investors learn that a company has debts that it has become unable pay, they may decide that the company isn't a good investment and sell their shares.

Toxic Debt and Deleveraging

Toxic debt i💮s any debt that has little chance of being repaid (both principal and interest).

The inability to sell or service debt can result in business failure. Firms that hold 澳洲幸运5开奖号码历史查询:toxic debt in the form of fixed-income securities issued by failing companies can face a substantial ♏blow to their balance sheets as the market for those investments collapses꧂.

Such was the case for firms holding the debt of the investment banking firm Lehman Brothers prior to its 2008 🎀collapse.

The Deleverage Process for Banks

Banks are required to have a specific percentage of their assets held in reserve to help cover their obligations to c💮reditors, i🃏ncluding depositors that may make withdrawal requests.

They are also required to maintain certain ratios of capital to debt. To do so, banks deleverage when they fear that the loans they made will not be repaid or when🅺 the value of assets they hold declines.

When banks are concerned about getting repaid, as during the financial crisis, they slow down their lending. When lending slows, consumers can't borrow money, so they are less able to buy products and services from businesses.

Similarly, businesses can't borrow to expand, so hiring slows and some companies are forced to sell assets at a discount to repay existing bank loans.

The Deleverage Effect on Security Prices

If many banks deleverage at the same time, stock prices fall as companies that can no longer borrow from the banks are revalued based on the price of assets that they are trying to sell atꦏ a discount.

Debt mar🍎kets may potentially crash as investors become reluctant to hold the bonds from troubled companies or to buy investm♋ents into which debt is packaged.

The Government and Deleveraging

When deleveraging creates a downward spiral in the economy, the government may be forced to step in. Governments take on leverage to buy assets and put a floor under prices♎, or to encourage spending.🎃

For example, the government might:

• Buy 澳洲幸运5开奖号码历史查询:mortgage-backed securities (MBS) to prop up housing prices and encourage bank lending
• Issue government-backed guarantees to prop up the value of certain securities
• Take financial positions in failing companies
• Provide tax rebates directly to consumers
• Subsidize the purchase of appliances or automobiles through tax credits

The 澳洲幸运5开奖号码历史查询:Federal Reserve (Fed) can also lower the 澳洲幸运5开奖号码历史查询:federal funds rate to make it less expensive for banks to borrow money from each other, push down interest rates, and encourage banks to lend to consumers an🌜d businesses.

The Bottom Line

Deleveraging by corporations and other businesses involves executing a strategy to raise funds rapid🌼ly to pay off debt that has become burdensome.

In times of financial crises, the government may have to step up to buy certain amounts of this debt. But it can't do so without restraint, as government debt must eventually be repaid by taxpayers.

Broadly speaking, it's a good idea for the financial health of companies and the economy that the responsible parties in business and the government implement internal controls and policies to prevent future downward spirals and the need for deleveraging.