What Is a Maturity Mismatch?
Let me explain maturity mismatch directly: it's when there's a disconnect between your company's short-term assets and short-term liabilities, specifically if you have more of the latter than the former. This can also happen when a hedging instrument doesn't align with the maturity of the underlying asset. You might hear it called an asset-liability mismatch too.
Key Takeaways
- A maturity mismatch often means a company's short-term liabilities exceed its short-term assets.
- You can spot maturity mismatches on a company's balance sheet, and they reveal insights into its liquidity.
- These mismatches frequently point to inefficient use of assets by the company.
- Maturity mismatches can also arise in hedging when the instrument and underlying asset maturities don't match.
Understanding a Maturity Mismatch
I want you to grasp that maturity mismatch typically refers to issues on a company's balance sheet. If your short-term liabilities outweigh your short-term assets, you can't meet financial obligations, and funding long-term assets with short-term liabilities will cause problems too.
These mismatches highlight your company's liquidity by showing how you organize asset and liability maturities. They can also indicate you're not using assets efficiently, which might lead to a liquidity crunch.
Mismatches occur in hedging as well. This is when the maturity of an underlying asset doesn't match the hedging instrument, resulting in an imperfect hedge. For instance, if a one-year bond future has an underlying bond maturing in three months, that's a mismatch.
Preventing Maturity Mismatches
You need to know that financial officers or treasurers must closely monitor loan or liability maturity schedules. They should match expected cash flows with future obligations for loans, leases, and pensions as much as possible.
A bank shouldn't rely too heavily on short-term funding from depositors to support long-term mortgage loans or assets. An insurance company avoids investing excessively in short-term fixed income securities for future payouts, and a treasurer's office won't overdo short-term investments for long-term pension needs.
In a broader context, a non-financial company faces maturity mismatch risk if it takes a short-term loan for a project or capital expenditure that won't generate cash flows until later. For example, an infrastructure contractor borrowing for five years creates risk if project cash flows start in 10 years.
Special Considerations
Exact matching of maturities, like aligning cash flows from assets to liabilities as they due, isn't always practical or desirable. For a bank needing profitability spreads, borrowing short-term from depositors and lending long-term at higher rates creates a net interest margin for profits.
Financial companies like banks can actually benefit from maturity mismatches by borrowing short-term at lower rates and lending long-term at higher ones, which should boost profit margins.
Example of Maturity Mismatch
Companies with heavy borrowing must watch their maturity schedules, as shown in this example. Struggling home-builder K. Hovnanian Enterprises faced near-term maturities of two senior secured second lien notes in 2018 and 2020, so in 2017, it issued senior secured notes maturing in 2022 and 2024 to pay off the shorter ones.
This step was necessary because the company knew it wouldn't generate enough cash for the 2018 and 2020 liabilities, and it had to address the initial maturity mismatch this way.
