Breakage Fees Calc
Hey Everyone,
I'm trying to understand the calculation of breakage fees on bonds (am I correct in saying term loans generally don't have breakage fees) in the context of a buyout.
If a bond is callable, you just pay whatever it is trading at + some premium? What if it's not callable? Then there's breakage, but I'm trying to understand how you would go about exactly calculating that.
Thanks to anyone who can help!
If it's not callable then you have to pay all future debt service so you will have to PV each payment back to the date you want to 'call' (defease) the bonds on. Basically you will put a bunch of money into an escrow that buys Treasuries that match maturities with your future payments. So you are PVing each payment back by the respective treasury. Generally referred to as a make whole call (ie the holders are being made whole).
Thanks for the explanation. During the summer I heard Analysts getting percentages from GCM. So for example, if a bond was $100MM, they would say you have to pay 110% to break, so retire the $100MM and then pay $10MM in breakage on top. Is that just them simplifying so they don't have to use a make-whole matrix?
Don't know what GCM is but maybe that was just the call premium? 10% sounds high (maybe you just made that # up). Make whole would actually come out (usually) to a lot more than 10% on top of the par so I'm guessing it was just the call premium. In that case you just pay the par + par premium * par, exactly like you said.
sorry, GCM is the abbrev for capital markets. ok, and when capital markets (or anyone else) quotes the call premium, is that premium derived from some make-whole calculation (i do realize i should probably ask capital markets this haha).
i'm just trying to understand if the make-whole would generally tie with the premium. sounds like it does? pay the bondholders a premium to redeem early vs. payments they require to make them whole.
It will be in the bond offering documents and set before the issue goes to market and will be reflected in the yield/price of the bonds sold.
Voluptate maxime voluptatum incidunt rem error velit mollitia. Nemo occaecati architecto sunt est est voluptas.
Harum in quae consequatur vitae ipsa illo qui quas. Alias sequi et modi quibusdam. Architecto qui eum eaque culpa.
Omnis velit voluptate sed voluptatem id sed. In ipsam fuga fuga consequatur. Quia reprehenderit quasi deleniti facilis est dolorem aut distinctio. Eos omnis tempora voluptatum quia. Quia possimus rerum vero rerum ut rerum perferendis.
Nemo quae ut quasi. Aut dignissimos qui at incidunt consequuntur inventore. Architecto nemo ea quam explicabo non in. Quidem voluptatum fuga eius ut dolore voluptatem inventore. Et consectetur est voluptate illo ut.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...