In its most basic term, a debt matures only when it becomes due. However, depending upon the financial condition of a company, loan terms can be modified or structured in such a way so that they have a different maturity period. This process of debt management is known as debt maturity structure.
Modes of structuring debt maturity
Here are few ways that a company can structure their debt obligations in order to stay current with their loan repayments:
- Trade-Offs – According to some financial experts, long-term maturing debts do not enjoy much importance as compared to debts with shorter maturity period. In other words, shorter-maturing debts are superior to long-term ones. Due to this fact, a lot of lenders prefer to work with those companies that have shorter maturity structure of debt. This happens, even if longer-term maturity debts cost higher in terms of interest to the borrowers.
- Ladder – Multiple notes of varying maturity period listed in the form of a structure is called a ladder. These loans can be arranged in accordance to their increasing maturity deadline. As a result of this mode of debt maturity, companies can lessen their burden of making the loan repayments all at the same time. Actually what happens in this regard is that, the total loan balance doesn’t become due straight away.
Major factors of debt maturity structure
It is the responsibility of the financial managers to keep their company’s credit account current. For this reason, they continuously pursue the process of debt maturity structure to help themselves meet their company’s financial liabilities with ease. However, no financial manager of a company can afford to work independently on this subject. Instead, these professionals manage their company’s finances with the help of accountants and corporate treasurers.
Here are some of the factors that financial managers have to consider while creating the maturity structure of their company’s debts:
- Regulatory compliance – One amongst all the important factors that are crucial in case of debt maturity structure is rules and regulations related to them. In this case, financial managers will have to comply with the law of the land governing such deals. This is all the more an imperative issue for industries that command stringent government control. Suppose, a financial institution must follow all the rules that speaks of the necessary amounts of regulatory capital while contemplating long-term debts over shorter-term loans.So, it’s the duty of the institution to borrow loans without hampering its capital ratio needs. Alternatively, an insurance provider should opt for such a debt maturity structure that has been done in accordance to the solvency constraints set forth by the National Association of Insurance Commissioners (NAIC).
- Corporate solvency – Corporate solvency refers to the amount of money a commercial organization is allowed to stack up and whether or not the saved amount is substantial enough to fuel its growth or improve its value proposition. Though cash flow analysis is said to provide an overview of an organization’s financial solidarity, yet solvency evaluation is a much better way to understand the company’s financial health as well as its strategic growth in a given time-period.Take for instance, two types of solvency ratios – current ratio and working capital. These ratios help the financial managers to determine whether or not there is enough cash to repay short-term loans, get back receivables or put up inventories for sale.
In addition to that, financial managers keep a close watch on the credit market factors and evaluate them prior to their selection of a definite debt maturity structure. Actually, it’s a categorization of corporate financial liabilities either in terms of maturity or expiration deadline.