Across the capital markets, one financing provision may present more uncertainty than any other—the "make-whole" or redemption premium provision. This fateful provision is intended to ensure that lenders receive the benefit of their bargain in a lending transaction. That is, when providing financing to a borrower, capital markets lenders expect the financing to remain outstanding for a period of time and expect to earn interest and fees during that time. If a borrower voluntarily redeems a financing facility, a typical make-whole or redemption provision entitles a lender to the monetary difference between the return expected through maturity on the investment that was paid off early and the amount the lender would receive through a new investment. Sometimes referred to as a yield maintenance provision, the make-whole is crucial to an efficient capital market.

Optional redemption provisions face two major attacks in bankruptcy proceedings. First, a debtor may assert that a provision is not enforceable because a payment or redemption under a bankruptcy plan is not a voluntary redemption of debt typically required to entitle a lender to compensation. Secondly, a party may challenge a make-whole premium as a claim for unmatured interest, which is not permitted in a bankruptcy proceeding.

Contractual Language (and Jurisdiction) Matter

A typical bond indenture includes a default provision automatically accelerating all amounts due under the indenture upon the filing of a bankruptcy by an issuer of debt. The same bond indenture also likely includes a separate optional redemption provision unrelated to its default provisions entitling bondholders to be made "whole" if the bonds are voluntarily redeemed before maturity or any other set date in the bond indenture. Debtors often challenge this optional redemption provision in a bankruptcy proceeding.