Lesson 3 of 7
The maturity schedule
Companies rarely fail because they owe too much. They fail because they owe it in a year when nobody will refinance it, and no ratio holds that date.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- A maturity schedule is a table of contractual repayment dates in the debt note; no leverage ratio contains it.
- Two companies can hold identical debt-to-equity, coverage and total-debt figures with completely different refinancing risk.
- Coverage and refinancing risk answer different questions: coverage asks whether this year's profit pays this year's interest, and says nothing about who will replace a maturing loan.
Every leverage ratio is a level measured on one balance sheet date. The principal on a loan arrives on a specific date, and on that date the company either has the cash, has a lender willing to replace the instrument, or does not. There is no averaging available, and none of the three ratios in the previous lesson holds that date.
Ladder B's repayments against Ladder A's 100 a year
- Year 1$0m
- Year 2$0m
- Year 3$900m
- Year 4$50m
- Year 5$50m
- Thereafter$0m
Ladder A, each of years 1 to 5: $100m
Where the schedule actually is
The long-term debt note, inside Item 8 of a 10-K, carries a table of contractual maturities for each of the next five fiscal years, plus one line for everything after that. Item 7, management's discussion and analysis, discusses the same obligations in prose, alongside how the company expects to meet them. Item 6, Selected Financial Data, was eliminated by the SEC's 2020 amendments and never carried this table in any case.
Four things to read off it
The largest single year, as a share of the total. A maturity wall is one year holding a disproportionate share of the borrowings, a concentration of risk on one date rather than a problem by itself.
The thereafter line. Everything beyond year five sits in one figure. A company with half its borrowings there has told you almost nothing about half its obligations.
Fixed or floating, and at what rate. Interest coverage uses last year's interest expense, so it measures the rate that applied, not the rate that will. A floating tranche reprices without anything being refinanced.
The revolver's own expiry against the term debt it would cover. A revolving facility expiring before a bond it is meant to bridge is not a bridge; it is two refinancings, and the first has to succeed before the second is even attempted.
Coverage does not see refinancing risk
Coverage asks whether this year's operating profit exceeds this year's interest, a question about the income statement, answerable from the filing. Refinancing risk asks whether somebody will replace a maturing instrument on terms the company can carry, a question about the capital markets on a future date, and it is not answerable from any filing. A company can hold excellent coverage and serious concentration in one maturity year. Another can hold weak coverage and no refinancing exposure worth discussing, because nothing is due for years and cash covers the interest until then. A refinancing that fails is itself a default.
The same wall, a different market
A large maturity at a strong borrower in an open market is refinanced in an afternoon and never becomes news. The same borrower, the same wall, two years later in a market that has closed to new issuance, is a different situation, and nothing on the balance sheet changed between the two. The company controls the date; the market controls the terms.
Marks argues in Mastering the Market Cycle that excess in one direction creates the correction in the other; the schedule tells you which date meets that cycle.
Fifteen minutes against a real 10-K
- Open Item 8, find the long-term debt note, and copy the five annual maturities and the thereafter line.
- Mark the largest single year and express it as a share of the total.
- Note the expiry date of any revolving facility, and whether the borrowings are fixed or floating from the instrument list.
Check yourself
Two companies hold identical debt-to-equity and interest coverage ratios. What can you not conclude?
- That both carry the same debt relative to book equity
- That both companies face the same refinancing risk
- That both companies report the same interest expense relative to profit
Show the answer
Answer: B.
Identical levels can sit on completely different maturity ladders. One company may spread repayment evenly; the other may concentrate most of it in a single year, and no leverage ratio shows the difference.Where is a company's contractual debt maturity schedule found?
- Item 6, Selected Financial Data
- The long-term debt note in Item 8
- The cover page of the 10-K
Show the answer
Answer: B.
The schedule sits in the long-term debt note inside Item 8. Item 6 was eliminated by the SEC in 2020 and never carried this table.What does interest coverage of 5.0 times tell you about a maturing bond next year?
- The bond will be refinanced without difficulty
- The company cannot afford to repay it
- Little on its own; coverage is profit against interest, not a statement about who will refinance
Show the answer
Answer: C.
Coverage measures whether operating profit exceeds the interest bill this year. A lender will look at it, but it does not say whether the market will replace the bond on workable terms on that date.Sources
- U.S. Securities and Exchange Commission, amendments eliminating Item 6, Selected Financial Data, effective 2021.
- Marks, Mastering the Market Cycle, 2018, on excess in one direction creating the correction in the other.
What this leaves out
- This lesson gives no threshold for how much concentration in a single year is safe. It says where the dates are and what the leverage ratios are silent about.
- A maturity schedule is contractual as filed and changes between filings as a company refinances, issues and repays during the year.
- The ladders shown are round invented figures.
- Nothing here is advice about any security.