Call protection

Call protection is the set of clauses that make voluntary prepayment of a loan costly during its first years. It secures part of the expected return for the lender when the borrower refinances earlier than planned, for example after a fall in market margins or an improvement in its credit profile. It takes several forms. Non-call prohibits any prepayment. According to the law firm Proskauer, this form has disappeared from the European and US loan markets. Make-whole requires the borrower to pay the interest the lender would have received until the end of the protected period, with that amount discounted where relevant. The fixed premium, expressed as a percentage of the amount repaid, decreases from year to year, for example 2% then 1%. In the European private credit transactions of 2022 analysed by Proskauer, a make-whole applied in the first year in just over 60% of cases and a premium of 2% or 1% in the second year in about 65% of cases. More than 80% of transactions had no protection left from the third year. European private credit lenders resist soft call, which applies only to a refinancing aimed at lowering the rate. They ask for protection on any voluntary prepayment, including on a change of control, a sale or an IPO. The borrower negotiates the length of the protection, its level and its exceptions according to the likely date of its shareholder’s exit or of a refinancing.

A mid-cap company has borrowed €150m in unitranche with a premium of 2% in the second year and 1% in the third. If it refinances after 18 months, it pays a €3m penalty. If it waits until the start of the third year, the penalty falls to €1.5m. This amount equals the annual interest saving from a margin reduction of 1 percentage point.

• The length of the protection and the level of each step
• The make-whole calculation and the discount rate used
• The exceptions for a change of control, an IPO or a sale
• Whether it applies to mandatory prepayments from asset disposals or excess cash flow