Getting a Make-Whole Premium Upon Bankruptcy?: Courts Say “Probably Not”. If repayment of debt is accelerated as a result of bankruptcy, are debtholders eligible to receive a make-whole premium? The answer from an increasing number of courts is, without specific language in the indenture, no. Indentures usually include specific language to protect investors by declaring that upon certain designated “bankruptcy events,” all outstanding securities issued under that indenture become immediately due and  payable (without further action from the holders of the securities).

This automatic acceleration remedy is usually reserved solely for an event of default as a result of a bankruptcy. The make-whole premium is an additional amount on top of the principal amount of the debt that becomes due on the date of redemption. These make-whole premiums are included to prevent companies from redeeming debt early to the detriment of debtholders. Unlike an  acceleration upon a bankruptcy event, optional redemption provisions are not automatic and become effective upon a decision by the issuer to redeem the debt early.

In a number of recent, high profile bankruptcy cases in New York and Delaware, trustees have argued, on behalf of debtholders, that acceleration as a result of an event of default arising out of a bankruptcy event should also be treated as an optional redemption. Their position is that the debtholders should be owed the applicable make-whole premium.1

In MPM Silicones, LLC, the Southern District of New York held against the  noteholders, holding that the right to a make-whole premium upon bankruptcy must be clearly stated in the relevant indenture, as it is in most optional redemption provisions. Without language specifically stating that a make-whole premium would be due and owing following a bankruptcy default and acceleration, it would not be due in such case.

This precedent was recently followed in Delaware. As with MPM Silicones, LLC, upon the April 2014 bankruptcy filing of Energy Future Holdings Corp. (“EFH”), payments of certain first lien notes issued by Energy Future Intermediate Holding Company LLC (“EFIH”) were automatically accelerated. EFIH sought permission for debtor-in-possession financing to repay the principal and accrued interest under the notes as required under the indenture.

The indenture trustee, acting on behalf of the noteholders, objected, arguing that the acceleration and repayment as a result of a voluntary bankruptcy constituted an “optional redemption,” which would require EFIH to pay the applicable make-whole premium.