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The Enforceability of Make-Whole Premiums in Bankruptcy
The treatment of prepayment premiums in bankruptcy has gained substantial attention in several recent bankruptcy cases. In some sense, seeking allowance of a prepayment premium is a “good problem to have” from the lender's viewpoint, because in most bankruptcy cases, lenders are facing a substantial write-down on their prepetition loans. But in a situation where the borrower has the funds to repay the loan, there is frequently a dispute between lenders and unsecured creditors or equityholders who are looking at less than a full recovery on their claims.
From the lender's perspective, prepayment of a loan can detrimentally impact its expected yield by eliminating expected interest payments. Many lenders view the loan facilities that they extend to borrowers as a long-term investment with income certainty. Financing agreements frequently contain “make-whole” or prepayment fees to protect a lender's right to the yield for which it contracted.
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