What Is a Maturity Mismatch?
Maturity mismatch refers to situations where there’s a disconnect between a company’s short-term assets and its short-term liabilities—particularly when the latter outweighs the former. This term can also apply to cases where a hedging instrument and the underlying asset’s maturities are misaligned.
Maturity mismatch is also known as an asset-liability mismatch.
Key Takeaways
- Maturity mismatch often indicates situations where a company’s short-term liabilities exceed its short-term assets.
- Maturity mismatches are visible on a company’s balance sheet and can provide insights into its liquidity status.
- Inefficient use of assets is often signaled by maturity mismatches.
- Hedging instruments and underlying asset misalignment can result in maturity mismatches.
How a Maturity Mismatch Affects Financial Stability
The term maturity mismatch commonly relates to situations involving a company’s balance sheet. A business cannot meet its financial obligations if its short-term liabilities outweigh its short-term assets. Similarly, long-term problems may also arise if long-term assets are matched with short-term liabilities.
Maturity mismatches highlight liquidity issues, showing how a company organizes the maturity of its assets and liabilities. This often implies inefficient asset utilization, potentially leading to a liquidity squeeze.
Hedging mismatches also occur when the maturity of an underlying asset doesn’t align with the hedging instrument, leading to an imperfect hedge. For example, a mismatch occurs if a bond for a one-year bond future matures in three months.
Strategies for Preventing Maturity Mismatches
Companies can prevent maturity mismatches through careful monitoring and strategic planning. Financial officers or treasurers need to align expected cash flows to future payment obligations such as loans, leases, and pension liabilities.
Banks, insurance companies, and other financial institutions must manage short-term funding and ensure it aligns with long-term obligations, like mortgage loans or fixed income securities for payouts. Non-financial companies also face maturity mismatch risks, especially when funding long-term projects with short-term loans.
Special Considerations and Balancing Acts
Exact matching of maturities is sometimes impractical and not necessarily desirable. For example, banks generate profit through net interest margins by borrowing short-term from depositors at low rates and lending long-term at higher rates.
Illustration of Maturity Mismatch
Companies that rely heavily on borrowing must be particularly mindful of their maturity schedules. For instance, K. Hovnanian Enterprises recognized it would not generate sufficient cash to meet near-term maturities in 2018 and 2020. To address this, the company issued senior secured notes in 2017, maturing in 2022 and 2024, effectively restructuring its debt and alleviating initial maturity mismatch issues.
Related Terms: liquidity, short-term assets, short-term liabilities, hedging, balance sheet.
References
- Nasdaq. “Maturity Mismatch Definition”.
- U.S. Securities and Exchange Commission. “Form 8-K: Hovnanian Enterprises, Inc. July 27, 2017”.
