A case currently before the U.S. Bankruptcy Court of the Southern District of Texas, In re Ultra Petroleum, No. 16-3302 (Bankr. S.D. Tx. filed April 29, 2016), has raised again the issue of how make-whole payments due from a borrower to bondholders, pursuant to the terms of credit documents governed by New York law, should be treated in the event of the borrower’s bankruptcy. Because the court’s decision on the make-whole payment issue in Ultra Petroleum will decide the fate of $200 million, this issue may continue to be litigated on appeal regardless of the bankruptcy court’s decision.
What Is Make-Whole?
Make-whole provisions are a yield protection mechanism that allows bondholders to rely on a guaranteed rate of return on their investment, particularly for long-term, fixed-rate investments. These provisions provide that upon the repayment or acceleration of a loan prior to its intended maturity (whether via certain voluntary prepayments, upon an event of default such as the filing of a petition for bankruptcy, or otherwise), a certain sum shall automatically become due and owing to the bondholders. The amount of this make-whole payment is generally calculated with respect to a formula that represents the amount the bondholders were owed over the remaining term of the investment, discounted to present value. Notably, borrowers may benefit from this yield protection mechanism by obtaining more favorable interest rates or fees than would otherwise be available absent such a yield protection mechanism.
