Make-whole
What are they?
The make-whole is a contractual provision that allows the borrower or bond issuer to cancel the debt before the maturity date, but in exchange for a penalty or compensation payment to the lender or investors. This compensation is designed to cover the present value of the future interest payments that the lender would no longer receive if the debt is repaid early.
The make-whole provision is common in corporate bond issues or long-term loans, and its purpose is to protect the lenders from the loss of interest income that would occur if the borrower decides to pay off the debt early. Instead of allowing the debt to be cancelled without penalty, the make-whole ensures that the lender receives adequate compensation for the interest payments they will no longer receive due to the early repayment.
Key aspects to consider
The payment of the make-whole call provision compensation is generally calculated using a formula that takes into account the interest rate of the bonds or loan, as well as the present value of future interest payments. This compensation ensures that the lender does not suffer a significant financial loss due to the early cancellation of the loan or bond.
Although the make-whole is beneficial for the lenders, it can also be costly for the borrowers or issuers, as it involves the payment of an additional sum to settle the debt before maturity. However, for companies or individuals looking to reduce the overall cost of long-term debt, this provision can offer a way to refinance at more favorable rates.