Maturity Mismatch

A maturity mismatch is a financial situation of a financial institution or company in which assets held to meet future liabilities are not aligned in terms of maturity time. How a company organizes the maturity of its assets and liabilities can give details into the liquidity of its position. When there is a material maturity mismatch, a liquidity squeeze could arise.

Loan or liability maturity schedules must be monitored closely by financial officers or treasurers of a firm. As much as it is prudent, they will attempt to match expected cash flows of the firm with future payment obligations for loans, leases and pension liabilities. A bank will not take on too much in short-term funding (liabilities to depositors) to fund long-term mortgage loans (bank assets). Similarly, an insurance company will not invest in too many short-term fixed income securities to meet future payouts; a city or state treasurer's office will also not invest in too many short-term securities to prepare for long-term pension payments. A non-financial firm, in a broader sense, also carries maturity mismatch risk if, for example, it borrows a short-term loan for a project or capital expenditure that will not produce cash flows until a later year. An infrastructure contractor that takes out a loan with a 5-year maturity will create maturity mismatch risk if the cash flows from the project begin in 10 years.

Exact matching of maturities (i.e., cash flows from assets to meet liabilities as they come due) is sometimes not 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 net interest margin for profits. Companies that borrow heavily, though, must be mindful of its maturity schedule, as illustrated in the following example.

Faced with near-term maturities of 2018 and 2020 for two Senior Secured Second Lien notes, struggling homebuilder K. Hovnanian Enterprises, Inc. in 2017 issued senior secured notes with maturities in 2022 and 2024 to pay off the notes with the shorter maturities. The company recognized that it would not generate sufficient cash to meet the 2018 and 2020 liabilities. The maturity mismatch issue has been alleviated for the time being.