Refinancing risk, in banking and finance, is the possibility that a borrower cannot refinance by borrowing to repay existing
debt
Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series of payments, which differentiates it from an immediate purchase. The d ...
. Many types of commercial lending incorporate
balloon payment
A balloon payment mortgage is a mortgage which does not fully amortize over the term of the note, thus leaving a balance due at maturity.Wiedemer, John P, ''Real Estate Finance, 8th Edition'', p 109-110 The final payment is called a ''balloon p ...
s at the point of final maturity. Often, the intention or assumption is that the borrower will take out a new loan to pay the existing lenders.
A borrower that cannot refinance their existing debt and does not have sufficient funds on hand to pay its lenders may have a
liquidity
Liquidity is a concept in economics involving the convertibility of assets and obligations. It can include:
* Market liquidity, the ease with which an asset can be sold
* Accounting liquidity, the ability to meet cash obligations when due
* Liqu ...
problem. The borrower may be considered technically
insolvent
In accounting, insolvency is the state of being unable to pay the debts, by a person or company (debtor), at maturity; those in a state of insolvency are said to be ''insolvent''. There are two forms: cash-flow insolvency and balance-sheet i ...
. Even though their assets are greater than their liabilities, they cannot raise the liquid funds to pay their creditors. Insolvency may lead to
bankruptcy even if the borrower has a positive
net worth
Net worth is the value of all the non-financial and financial assets owned by an individual or institution minus the value of all its outstanding liabilities. Since financial assets minus outstanding liabilities equal net financial assets, ne ...
.
To repay the debt at maturity, the borrower that cannot refinance may be forced into a
fire sale
A fire sale is the sale of goods at extremely discounted prices. The term originated in reference to the sale of goods at a heavy discount due to fire damage. It may or may not be defined as a closeout, the final sale of goods to zero inventory ...
of assets at a low price, including the borrower's own home and productive assets such as factories and plants.
Most large corporations and
bank
A bank is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank o