A make-whole agreement is a financial contract between a borrower and a lender, commonly used in the context of bond issuances. This agreement outlines the terms by which a borrower may redeem a bond or similar debt instrument prior to its scheduled maturity date. In essence, a make-whole agreement is a way for the lender to recover the full value of the loan, including any interest payments that would have been made if the borrower had not redeemed the debt early.
The purpose of a make-whole agreement is to protect the lender`s interest in the loan by ensuring that they are not financially harmed by early redemption. This agreement typically specifies a make-whole premium, which is an amount of money that the borrower must pay to the lender in addition to the outstanding principal and any accrued unpaid interest. This premium compensates the lender for lost future interest payments, transaction costs, and other expenses associated with the early redemption.
From a borrower`s perspective, a make-whole agreement can be beneficial if they are able to refinance their debt at a lower interest rate or if they need to restructure their debt due to financial difficulties. However, it can also be a costly option, as the make-whole premium can be substantial.
Make-whole agreements can be complex and have important implications for both the lender and borrower. As such, it is important to seek professional advice before entering into such an agreement to fully understand the terms and consequences. As with any financial contract, it is also important to carefully review and understand all the terms and conditions before signing on the dotted line.
In conclusion, a make-whole agreement is a financial contract that protects the lender`s interest in the loan by ensuring they are fully compensated if a borrower redeems their debt early. While this agreement can be beneficial in certain situations, it can also be costly. It is important to seek professional advice and carefully review all terms and conditions before entering into such an agreement.