What is a maturity mismatch?
Maturity mismatch is a term used to describe situations where there is a disconnect between a company’s short-term assets and its short-term liabilities, particularly more of the latter than the former. Maturity mismatches can also occur when a cover the instrument and the Underlying strengths deadlines are misaligned.
A maturity mismatch can also be referred to as an asset-liability mismatch.
Key points to remember
- A maturity mismatch often refers to situations where a company’s current liabilities exceed its current assets.
- Maturity mismatches are visible on a company’s balance sheet and can shed light on its liquidity.
- Maturity mismatches often mean a company’s inefficient use of its assets.
- Maturity mismatches can also occur when a hedging instrument and the maturities of the underlying asset are misaligned.
Understanding a deadline mismatch
The term maturity mismatch generally refers to situations involving balance sheet. A company cannot meet its financial obligations if its short-term debts outweigh its current assets and will likely encounter problems also if its long-term assets are funded by short-term liabilities.
Maturity mismatches can shed light on a company’s situation liquiditybecause they show how he organizes the maturity of its assets and liabilities. They can also mean that the company is not using its assets efficiently, which could lead to a squeeze on cash.
Asymmetries can also occur in coverage. This occurs when the maturity of an underlying asset does not match the hedging instrument, creating an imperfect hedge. For example, a mismatch occurs when the underlying one-year bond bond future matures in three months.
Prevention of maturity mismatches
Loan or responsibility timelines should be closely monitored by a company’s financial managers or treasurers. As much as it is safe, they will try to match expectations cash flow with future payment obligations for loans, leases and pension commitments.
A bank will not accept too much short-term funding – liabilities to depositors – to fund long-term mortgage bank loans or assets. Similarly, an insurance company will not invest in too many short-term contracts fixed income securities to meet future payments, and a city or state treasurer’s office will not invest in too many short-term securities to prepare for long-term pension payments.
In a broader sense, a non-financial corporation also bears a risk of maturity mismatch if, for example, it borrows a short-term loan for a project or capital expenditure (CapEx) which will not produce cash flow until a later year. An infrastructure contractor who takes out a loan with a term of five years will create the risk of a maturity mismatch if project cash flows begin in 10 years.
Exact matching of maturities, such as cash flows from assets to meet liabilities as they come due, is sometimes neither practical nor necessarily desirable. In the case of a bank that requires spread for profitability, borrowing short term from depositors and lending long term at a higher interest rate generates a net interest margin for profits.
Financial firms can take advantage of maturity mismatches when borrowing from depositors short-term and lending long-term at higher interest rates, as this is expected to lead to higher profit margins.
Example of Maturity Mismatch
Companies that borrow heavily need to be mindful of their timelines, as illustrated in the following example.
Faced with the short-term maturities of two second secured seniors privilege notes in 2018 and 2020, struggling homebuilder K. Hovnanian Enterprises issued senior secured notes in 2017. These Remarks have maturities in 2022 and 2024 to redeem the notes with the shorter maturities.
This action was deemed necessary because the company recognized that it would not generate enough cash to meet the liabilities of 2018 and 2020 and had to resort to it to mitigate the problem arising from the mismatch of the initial maturities.
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