What Is a Maturity Mismatch?
Maturity mismatch is a period of time used to give an explanation for situations when there’s a disconnect between a company’s brief property and its brief liabilities—specifically additional of the latter than the former. Maturity mismatches can also occur when a hedging device and the underlying asset’s maturities are misaligned.
A maturity mismatch can be referred to as an asset-liability mismatch.
Key Takeaways
- A maturity mismatch often refers to situations when a company’s brief liabilities exceed its brief property.
- Maturity mismatches are visible on a company’s balance sheet and can shed light on its liquidity.
- Maturity mismatches often signify a company’s inefficient use of its property.
- Maturity mismatches can also occur when a hedging device and the underlying asset’s maturities are misaligned.
Figuring out a Maturity Mismatch
The period of time maturity mismatch repeatedly alludes to situations involving a company’s balance sheet. A business can’t meet its financial tasks if its brief liabilities outweigh its brief property and can probably run into problems, too, if its long-term property are funded via brief liabilities.
Maturity mismatches can shed light on a company’s liquidity, as they show how it organizes the maturity of its property and liabilities. They can moreover signify that the company is not using its property effectively, which may give rise to a squeeze in liquidity.
Mismatches can occur in hedging as well. This happens when the maturity of an underlying asset does no longer are compatible the hedging device, thus creating a not quite perfect hedge. As an example, a mismatch occurs when the underlying bond in a one-year bond long term matures in 3 months.
Preventing Maturity Mismatches
Loan or criminal accountability maturity schedules must be monitored closely via a company’s financial officers or treasurers. As much as it is prudent, they are going to check out to suit expected cash flows with long term price tasks for loans, leases, and pension liabilities.
A economic establishment may not take on quite a lot of in brief funding—liabilities to depositors—to fund long-term mortgage loans or economic establishment property. Similarly, an insurance policy company may not invest in too many brief fixed income securities to meet long term payouts, and a the town or state treasurer’s place of job may not invest in too many brief securities to arrange for long-term pension expenses.
In a broader sense, a non-financial company moreover carries maturity mismatch probability if, as an example, it borrows a brief loan for a problem or capital expenditure (CapEx) that may not produce cash flows until a later one year. An infrastructure contractor that takes out a loan with a five-year maturity will create maturity mismatch probability if the cash flows from the problem get started in 10 years.
Specific Considerations
Exact matching of maturities—paying homage to cash flows from property to meet liabilities as they come due—is sometimes not smart nor necessarily interesting. With regards to a economic establishment that requires spread for profitability, borrowing brief from depositors, and lending long-term on the subsequent interest rate generates a internet pastime margin for income.
Financial corporations can get pleasure from maturity mismatches after they borrow from brief depositors and lend long-term at higher interest rates as this must lead to higher receive advantages margins.
Example of Maturity Mismatch
Corporations that borrow carefully must remember of their maturity schedules, as illustrated throughout the following example.
Faced with the near-term maturities of two senior secured second lien notes in 2018 and 2020, struggling home-builder Ok. Hovnanian Enterprises issued senior secured notes in 2017. The ones notes have maturities in 2022 and 2024 to pay off the notes with the shorter maturities.
This movement used to be as soon as deemed necessary given that company identified it will not generate sufficient cash to meet the 2018 and 2020 liabilities and had to resort to this to alleviate the issue arising from the initial maturity mismatch.
