Maturity Mismatch: Definition, Example, Prevention

What Is a Maturity Mismatch?

Maturity mismatch occurs when a company has more short-term liabilities than short-term assets or when the maturities of a hedging instrument and the underlying asset are misaligned.

A maturity mismatch can also be referred to as an asset-liability mismatch.

Key Takeaways

• A maturity mismatch occurs when a company’s short-term liabilities exceed its short-term assets.
• Maturity mismatches are visible on a company’s balance sheet and can reveal its liquidity.
• Maturity mismatches often indicate inefficient asset use.
• Maturity mismatches can also occur when a hedging instrument and the underlying asset’s maturities are misaligned.

Understanding a Maturity Mismatch

A maturity mismatch refers to situations where a company’s balance sheet reveals an imbalance between its short-term liabilities and assets. This imbalance can lead to financial difficulties, especially if long-term assets are funded by short-term liabilities.

Maturity mismatches can provide insights into a company’s liquidity and the efficiency of its asset utilization, potentially resulting in liquidity challenges.

Mismatches can also occur in hedging. For example, an imperfect hedge is created when the maturity of an underlying asset does not align with the hedging instrument. For instance, a mismatch can occur if the underlying bond in a one-year bond future matures in three months.

Preventing Maturity Mismatches

Financial officers or treasurers in a company must closely monitor loan or liability maturity schedules. They strive to align expected cash flows with future payment obligations associated with loans, leases, and pension liabilities.

A bank avoids excessive short-term funding (liabilities to depositors) to finance long-term mortgage loans or bank assets. Similarly, an insurance company prevents excessive investment in short-term fixed income securities to meet future payouts. City or state treasurer’s offices refrain from investing excessively in short-term securities for long-term pension payments as well.

Companies outside the financial sector also face maturity mismatch risks. For example, a company that borrows a short-term loan for a project or capital expenditure (CapEx) not expected to generate cash flows until a later year carries a maturity mismatch risk. An infrastructure contractor securing a loan with a five-year maturity, while project cash flows begin in 10 years, exemplifies this risk.

Special Considerations

Exact matching of maturities is not always practical or desirable. For instance, a bank may borrow short-term from depositors and lend long-term at higher interest rates to generate spread and profitability.

Financial companies like banks can benefit from maturity mismatches when they borrow from short-term depositors and lend long-term at higher interest rates, as this should lead to higher profit margins.

Example of Maturity Mismatch

Companies that borrow heavily must be mindful of their maturity schedules, as illustrated by the following example.

In order to meet near-term maturities of two senior secured second lien notes in 2018 and 2020, struggling home-builder K. Hovnanian Enterprises issued senior secured notes in 2017 with maturities in 2022 and 2024. This allowed the company to pay off the notes with shorter maturities.

These actions were necessary because the company recognized that it would not generate sufficient cash to meet the 2018 and 2020 liabilities. Therefore, the company resorted to this strategy to alleviate the initial maturity mismatch issue.