The Life Cycle of Make-Whole Call Provisions
56 Pages Posted: 1 Sep 2012 Last revised: 25 Jun 2018
Date Written: June 10, 2018
Common perception is that these bonds behave no differently than non-callable bonds due to call provision structure. However, make-whole callable bonds are almost twice as likely to be retired early as equivalent non-callable bonds. Analysis of which bonds/firms include make-whole call provisions as well as analysis of retirement events suggests the call provisions aid firms in precautionary refinancing and in paving the way for major corporate events like M&A. Detailed analysis of news reports reveal three motivating rationales: 1) to refund the debt at what are perceived to be low current interest rates, 2) as a result of a merger or acquisition, and 3) as a mechanism for paying out excess cash.
Keywords: call provision, make-whole
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