Maturity Mismatch Definition

What Is a Maturity Mismatch?

Maturity mismatch is a time period used to explain conditions when there is a disconnect between an organization’s short-term belongings and its short-term liabilities—particularly extra of the latter than the previous. Maturity mismatches may happen when a hedging instrument and the underlying asset’s maturities are misaligned.

A maturity mismatch may be known as an asset-liability mismatch.

Understanding a Maturity Mismatch

The time period maturity mismatch generally alludes to conditions involving an organization’s steadiness sheet. A enterprise can not meet its monetary obligations if its short-term liabilities outweigh its short-term belongings and can possible run into issues, too, if its long-term belongings are funded by short-term liabilities.

Maturity mismatches can make clear an organization’s liquidity, as they present the way it organizes the maturity of its belongings and liabilities. They’ll additionally signify that the corporate isn’t utilizing its belongings effectively, which may give rise to a squeeze in liquidity.

Mismatches can happen in hedging as effectively. This occurs when the maturity of an underlying asset would not match the hedging instrument, thus creating an imperfect hedge. For instance, a mismatch happens when the underlying bond in a one-year bond future matures in three months.

Stopping Maturity Mismatches

Mortgage or legal responsibility maturity schedules should be monitored carefully by an organization’s monetary officers or treasurers. As a lot as it’s prudent, they may try to match anticipated money flows with future cost obligations for loans, leases, and pension liabilities.

A financial institution is not going to tackle an excessive amount of in short-term funding—liabilities to depositors—to fund long-term mortgage loans or financial institution belongings. Equally, an insurance coverage firm is not going to put money into too many short-term fastened earnings securities to satisfy future payouts, and a metropolis or state treasurer’s workplace is not going to put money into too many short-term securities to arrange for long-term pension funds.

In a broader sense, a non-financial firm additionally carries maturity mismatch danger if, for instance, it borrows a short-term mortgage for a mission or capital expenditure (CapEx) that won’t produce money flows till a later 12 months. An infrastructure contractor that takes out a mortgage with a five-year maturity will create maturity mismatch danger if the money flows from the mission start in 10 years.

Particular Concerns

Precise matching of maturities—reminiscent of money flows from belongings to satisfy liabilities as they arrive due—is usually not sensible nor essentially fascinating. Within the case of a financial institution that requires unfold for profitability, borrowing short-term from depositors, and lending long-term at the next rate of interest generates a web curiosity margin for earnings.

Instance of Maturity Mismatch

Corporations that borrow closely should be conscious of their maturity schedules, as illustrated within the following instance.

Confronted 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. These notes have maturities in 2022 and 2024 to repay the notes with the shorter maturities.

This motion was deemed essential as a result of the corporate acknowledged it will not generate enough money to satisfy the 2018 and 2020 liabilities and needed to resort to this to alleviate the difficulty arising from the preliminary maturity mismatch.