Historically, investment grade debt with a make-whole provision was fairly straightforward. At any time during the life of the instrument, the issuer had the right to redeem the debt. But the price to be paid included the discounted value of the remaining payments of principal and interest over the life of the debt. Because the cost of paying the “make-whole” is often significant, issuers seldom redeem bonds when they are required to pay the make-whole price.

Over the past several years, “par calls” (at a price of 100% of the principal amount of the debt being redeemed plus accrued and unpaid interest) near the end of maturity have been relatively standard in investment grade utility debt. The duration of the par call varies depending on the tenor of the debt. A six-month par call is common for a 30-year bond, while a three-month par call is relatively market for a 10-year bond.

Over the past few months, another feature has become increasingly common in the investment grade debt world—calculating the make-whole price off of the par call date, rather than the maturity date. The idea is that the issuer will likely redeem the bonds on the par call date, rather than waiting until the ultimate maturity and as such, arguably it makes more sense to calculate the make-whole premium off of such earlier date. The necessary revisions to the underlying indenture documents as well as to the disclosure are relatively straightforward.

This modified calculation has the effect of saving issuers, upon make-whole redemption, an amount roughly equivalent to the discounted value of the interest, which, but for the par call, would have accrued between the par call date and the maturity date. Note too that the Treasury security selected by the investment banks to set the discount rate is also based on the par call date, rather than the final maturity date.1