Maturity Mismatch

What Is a Maturity Mismatch?

Maturity mismatch is a term used to portray circumstances when there's a distinction between a company's short-term assets and its short-term liabilities — explicitly a greater amount of the last option than the former. Maturity mismatches can likewise happen when a hedging instrument and the underlying asset's maturities are skewed.

A maturity mismatch may likewise be alluded to as an asset-liability mismatch.

Understanding a Maturity Mismatch

The term maturity mismatch usually insinuates circumstances including a company's balance sheet. A business can't meet its financial obligations in the event that its short-term liabilities offset its short-term assets and will probably run into issues, too, in the event that its long-term assets are funded by short-term liabilities.

Maturity mismatches can reveal insight into a company's liquidity, as they show how it coordinates the maturity of its assets and liabilities. They can likewise connote that the company isn't utilizing its assets productively, which could lead to a squeeze in liquidity.

Mismatches can happen in hedging too. This happens when the maturity of an underlying asset doesn't match the hedging instrument, subsequently making an imperfect hedge. For instance, a mismatch happens when the underlying bond in a one-year bond future develops in 90 days.

Forestalling Maturity Mismatches

Loan or liability maturity plans must be observed closely by a company's financial officers or financiers. However much it is prudent, they will endeavor to match expected cash flows with future payment obligations for loans, rents, and pension liabilities.

A bank won't take on too much in short-term funding — liabilities to contributors — to fund long-term mortgage loans or bank assets. Likewise, an insurance company won't invest in too some short-term fixed income securities to meet future payouts, and a city or state financier's office won't invest in too some short-term securities to prepare for long-term pension payments.

From a more extensive perspective, a non-financial company likewise conveys maturity mismatch risk if, for instance, it borrows a short-term loan for a project or capital expenditure (CapEx) that won't deliver cash flows until a later year. An infrastructure contractor that applies for a new line of credit with a five-year maturity will make maturity mismatch risk in the event that the cash flows from the project start in 10 years.

Special Considerations

Precise matching of maturities —, for example, cash flows from assets to meet liabilities really — is some of the time not viable nor fundamentally attractive. On account of a bank that requires spread for profitability, borrowing short-term from contributors, and lending long-term at a higher interest rate generates a net interest margin for profits.

Financial companies can benefit from maturity mismatches when they borrow from short-term investors and loan long-term at higher interest rates as this ought to lead to higher profit margins.

Illustration of Maturity Mismatch

Companies that borrow vigorously must be aware of their maturity plans, as illustrated in the accompanying model.

Confronted with the close term maturities of two senior secured second lien notes in 2018 and 2020, battling home-manufacturer K. Hovnanian Enterprises issued senior secured notes in 2017. These notes have maturities in 2022 and 2024 to pay off the notes with the shorter maturities.

This action was considered significant on the grounds that the company recognized it wouldn't generate adequate cash to meet the 2018 and 2020 liabilities and needed to resort to this to lighten the issue emerging from the initial maturity mismatch.

Features

• Maturity mismatches frequently imply a company's inefficient utilization of its assets.
• A maturity mismatch frequently alludes to circumstances when a company's short-term liabilities surpass its short-term assets.
• Maturity mismatches are noticeable on a company's balance sheet and can reveal insight into its liquidity.
• Maturity mismatches can likewise happen while a hedging instrument and the underlying asset's maturities are skewed.