Deleveraging is the process of paying back debt in order to reduce the risk of default. This is most critical when management finds that the firm is in danger of not generating enough cash flow to meet its debt repayment obligations. This situation is especially common when economic conditions are declining, which drives a decline in sales. Another reason to deleverage is when a business shifts out of its initial growth phase, and so no longer needs as much debt to fund ongoing increases in its working capital requirements.
There are several ways to deleverage, which include the following ways to raise cash:
Sell off assets
Sell off an operating unit
Sell shares in the business
Lengthen payment terms to suppliers
Accelerate the turnover of inventory