Debt Maturity Ladders
Two companies can owe the same amount and face completely different risks. The difference is when the debt has to be repaid or refinanced.
Why this matters for beginners
Many companies get into trouble not because their debt is too large, but because too much of it comes due at a bad moment. Learning objectives: read a maturity schedule, understand refinancing risk, and connect it to interest rates and covenants.
Main explanation
Short-term debt is due within a year; long-term debt is due later. Short-term debt must be repaid or refinanced soon, so it depends heavily on current market conditions.
Refinancing risk is the danger that when debt matures, the company cannot borrow again on acceptable terms. In a crisis, lenders may simply say no.
Fixed-rate debt keeps the same interest cost until maturity. Floating-rate debt resets with market rates, so rising rates raise interest costs quickly. When fixed debt matures in a higher-rate world, the replacement loan costs more.
Interest coverage, operating profit divided by interest expense, shows how comfortably profits pay the interest bill. Coverage of 8 times is comfortable; 1.5 times leaves little margin.
Covenants are conditions in loan agreements, such as a maximum debt-to-profit ratio. Breaking one can let lenders demand early repayment or tougher terms.
A maturity ladder spreads repayments over many years. Example: Company A owes 1 billion due as 200 million a year for five years. Company B owes 1 billion all due next year. Company B carries much higher refinancing risk.
Example using a real company
An energy company like Shell typically spreads bond maturities over many years so that no single year forces it to refinance during a commodity downturn.
- →Ladder: 200m due each year for five years, manageable from cash flow.
- →Wall: 1bn due in one year, dependent on lenders being willing.
- →Floating-rate loan at 3 percent becoming 6 percent: interest cost doubles.
Common beginner mistakes
- ✕Looking only at total debt and ignoring when it is due.
- ✕Assuming debt can always be refinanced.
- ✕Ignoring whether the debt is fixed or floating rate.
Key terms
- Maturity
- The date a loan or bond must be repaid.
- Refinancing risk
- The risk of not being able to replace maturing debt on acceptable terms.
- Covenant
- A condition in a loan agreement the borrower must meet.
- Interest coverage
- Operating profit divided by interest expense.
Key takeaways
- 01When debt is due matters as much as how much is owed.
- 02Spread-out maturities reduce refinancing risk.
- 03Floating rates and tight covenants add risk when conditions worsen.
Check yourself
- 01Two companies each owe 1 billion. Which usually has higher refinancing risk?
- 02What happens to floating-rate debt when market interest rates rise?
- 03What does interest coverage measure?
- 04What can happen if a company breaks a debt covenant?
- 05What is refinancing risk?
Try the concept on a real company
Open a company with significant debt in the Analyzer and look at how much is short-term versus long-term.
Educational examples only. Not buy or sell recommendations.