The Power of the Written Word: The Importance of the Language of Credit Agreements in Enforcing Make-Whole Provisions in Chapter 11 Restructuring Cases
As any writer can attest, words matter – not only the literal meaning of a word, but also the way in which words are arranged that could lead to numerous interpretations. Given today’s low interest rates, the language in Loan Agreements has become increasingly important in determining whether a Chapter 11 debtor is subject to the make-whole provision of their credit facilities.
The intent of the make-whole
Make-whole provisions are intended to compensate lenders if a debt is prepaid. A make-whole amount represents a reasonable estimate of damages caused by the prepayment to compensate investors for the loss of their contractual rate of return.
The interests of debtors and lenders/investors
Debtors in a Chapter 11 case recognize the need to refinance high interest rate debt. Debtors have benefitted from the interpretation of many bankruptcy courts that a bankruptcy filing accelerates the maturity date of the debt, so repayment of the debt cannot be interpreted as a “prepayment,” thus rendering the make-whole unenforceable. Debtors have also benefitted from court interpretations that the make-whole amount represents a claim for unmatured interest under Section 502(b)(2) of the U.S. Bankruptcy Code, which can be disallowed.
Secured lenders, eager to maintain returns on their investments, have become savvy in drafting credit agreements, including language that clearly indicates that make-whole amounts are due after acceleration or upon redemption – repayment before or after maturity as of a certain date – which is not impacted by acceleration.1
Changing climate of recent bankruptcy court rulings
As litigation increases, court opinions regarding enforceability of make-whole provisions hinge on contract interpretation. When presented with contract provisions specifying situations in which investors are entitled to their make-whole payment, regardless of acceleration, courts have a strong impetus to enforce such provisions.2
1Sandler, Bradford J. and Kim, Jonathan. “The Enforceability of a Make-Whole Provision in Bankruptcy: It Says What It Says.” TMA Journal of Corporate Renewal, May 2017, https://turnaround.org/jcr/2017/05/enforceability-make-whole-provision-bankruptcy-it-says-what-it-says. Accessed 19 October 2017.
2Elkin, Judith. “I meant what I said and I said what I meant: The Enforceability of Make-Whole Provisions in U.S. Loan Agreements and Bond Indentures.” Presentation at the American Bar Association Section of International Law Fall Meeting 2017, Miami, FL, October 24-27, 2017.