Distress & Turnarounds

Make-whole Enforceability in Bankruptcy

A hundred-million-dollar premium can survive or vanish on a single sentence about acceleration. Learn the three questions that decide it, and why the circuits reach different answers on the same facts.

  • Expert
  • 11 min total
  • 13 chapters

What decision this helps you make: Whether a make-whole or prepayment premium is triggered, allowable, and payable in a bankruptcy, and how to draft, price, or challenge one accordingly.

What this topic is

A make-whole is a contractual amount payable when debt is repaid before maturity, designed to compensate the lender for the interest it will not now receive. Typically it is the present value of remaining scheduled interest and principal, discounted at a Treasury rate plus a small spread, less the principal being repaid. In bankruptcy its enforceability turns on three separate questions: did the contract trigger it, is the resulting claim allowable under the Bankruptcy Code, and does anything else (oversecured status or the solvent-debtor exception) require it to be paid anyway.

Why it matters

On a $1bn bond issue with five years to maturity and a low Treasury discount rate, a make-whole can exceed $200m. That amount either belongs to the noteholders or belongs to everyone junior to them, and the answer depends on contract language written years earlier and on which circuit the case is filed in. Very few provisions in a debt document carry that much value on so little text.

Who should learn it

Credit investors and analysts modelling recoveries, capital markets and finance lawyers drafting indentures, restructuring professionals evaluating claims, and issuers deciding whether a filing will escape a premium.

What you will understand

  • Why acceleration usually destroys the trigger, and the drafting that prevents it
  • The Second and Third Circuit split on post-acceleration redemption language
  • Why §502(b)(2) disallows make-wholes as unmatured interest in several circuits, and what survives that
  • The solvent-debtor exception and the live disagreement over contract rate versus federal judgment rate

Prerequisites

Common misconception

"Our indenture has a make-whole, so if the company files we get it." Usually not, unless the indenture says so with unusual precision. Most indentures accelerate the debt automatically on a bankruptcy filing. Once accelerated, the entire principal is due now, so a repayment is not a prepayment, and a make-whole drafted to apply to optional redemption before maturity has nothing to attach to. The premium disappears not because a court disapproved of it, but because the event that was supposed to trigger it did not happen.