Wednesday, February 6, 2008

Refinancing risk

Refinancing risk

In banking and finance, refinancing risk is the possibility that a borrower cannot refinance by borrowing to repay existing debt. Many types of commercial lending incorporate bullet payments at the point of final maturity; often, the intention or assumption is that the borrower take out a new loan to pay the existing lenders.

A borrower that cannot refinance its existing debt and does not have sufficient funds on hand to pay its lenders may have a liquidity problem. It may be considered technically insolvent: although its assets are greater than its liabilities, it cannot raise the liquid funds to pay its creditors. Insolvency may lead to bankruptcy, despite the fact that the company has a positive net worth.

Most large corporations and banks face this risk to some degree, as they may constantly borrow and repay loans. In general, refinancing risk is only considered to be substantial in cases of financial crisis, when borrowing funds may be extremely difficult.

Refinancing is also known as "rolling over" debt of various maturities, and may be referred to as rollover risk.