Maturity Structure of Debt

Maturation of debt is when the debt comes due. Loans can be structured to mature at different times. This is called the maturity structure of the debt.

Ladder

• A ladder is a maturity structure made up of multiple notes with different maturity dates. The loans can be set to increasing term lengths. This prevents the whole balance coming due at once. It also allows for planning of debt payments many years in advance.

Rollover

• Debt financed over a short term, such as a one year note, will have a lower interest rate than a longer term note. If the borrower cannot pay off the debt that has come due, the borrower can roll over the debt into another loan. Rollovers allow companies to pay a lower interest rate than a longer term note for long periods of time. However, if no new lender extends a rollover loan, the debt comes due regardless of whether the borrower has the funds to cover it.

Trade-Offs

• According to "Handbook of Financial Intermediation and Banking" by Anjan Thakor and Arnoud Boot, debt with a shorter maturity structure has higher seniority than long term. This can result in lenders preferring companies with a shorter maturity structure of debt regardless of the higher interest rate of longer maturity debt.