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
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