Prepayment fee

The prepayment fee is the sum the borrower pays the lender when it repays all or part of a loan before the scheduled maturity. Between a company and its lenders, the amount results from negotiation. The loan template of the Euro PP Charter of October 2019 provides that a voluntary prepayment gives rise to no fee, except break costs if the prepayment falls outside an interest payment date and a penalty whose amount the parties set. The Charter specifies that this penalty depends on the nature of the rate, fixed or floating, on the remaining term, on the lenders’ status and on the economics of the transaction. For bonds, the Charter template offers a redemption option at the discounted amount (make-whole): the issuer pays the principal and interest still due, discounted at the rate of a reference government bond plus a margin. In an amend and extend, unitranche lenders ask for the non-call or prepayment protection period to restart from the date of the amendment. The fee forms part of the total cost of a refinancing, in the same way as the fees on the new debt.

A company refinances a €100m Euro PP at a 6% fixed rate with three years still to run. The contract provides for a make-whole calculated at the 2.5% reference government rate plus 0.5 percentage point. The fee covers the gap between the interest still due and this 3% discount rate, around €8.5m to finance on top of the principal.

• The length of the non-call period and the step-down of the penalty over time.
• The make-whole formula: reference rate and discount margin.
• The cases of repayment without penalty: change of control, illegality for a lender.
• The starting point of the protection in an amendment or an amend and extend.