The enforceability in bankruptcy of make-whole claims and expectation damages for breach of “no-call” provisions has been a hot topic, and the courts have not been wholly consistent. This article will highlight the key issues in the recent case law.
Make-whole amounts and no-call provisions are forms of yield protection designed to protect noteholders and bondholders from the loss of future fixed-rate interest when their bonds are paid prior to maturity in a declining-interest-rate environment. Make-whole amounts in private-placement note agreements, known as note-purchase agreements, and some public bond indentures are typically calculated according to a formula. Such an amount is the positive difference between the amount of principal and interest currently due and the net present value of the principal and interest payments that would have been made but for the borrower’s prepayment, discounted at a small premium over Treasury yields with a comparable maturity to the weighted average life to maturity of the underlying bonds. For other public bond issuances, the “yield maintenance premium” is stated as a declining percentage of par, e.g., 104 in year four, 103 in year five, etc. These are often accompanied in indentures (but not note-purchase agreements) by no-call provisions that prohibit prepayment altogether for a period of time, typically the first three years after issuance.
