make whole call provision wonder, different, provision, like

rkapoor

Hi, I'm new to this forum and I need help with a make whole call provison. I wonder how this provision works. this provision works like a call option, or may vary in different cases. it has to be define in the indenture?
Thank you for help

Analyze_This

A stipulation in a bond indenture that permits the borrower to redeem a bond prior to maturity by making a lump-sum payment equal to the present value of future interest payments that will not be paid because of the early call. The provision makes the bondholder whole by providing compensation for interest payments that are missed because of an early redemption.

It must be clearly defined in the indenture.

kingstongal

Lets do an example.

Look at ORCL 4.95 4/15/2013. Bonds were issued 04/09/2008 at 5YR+220 with a make whole call at +35.

What this means is that at any time, Oracle could call the bond at the price corresponding to the benchmark treasury, which is T 2.5 03/13 + 35 bps.

This would be a terrible deal for the issuer in most markets as the make whole call is often a price signficantly above market. However, with tight spreads and a upward sloping yield curve, the MHC can become signifcant. For instance, this bond currently trades, maybe +40/+35.

The offer side is right about where the issuer has a MHC. Some issues have been called at wider spread/lower price than offer side