Model Provision: Investment-Grade Bond Optional Redemption

Standardizing the make-whole redemption language and calculation.

Summary

Market participants have expressed the need for standardized language in investment-grade bond optional redemption provisions. SIFMA assembled a working group of investment banks operating in the U.S. and global capital markets to agree on general principles and model language.

The final version of the model provision was published by SIFMA on November 29, 2021; it was updated on March 31, 2023.

Download the Model Provisions with and without Par Calls; see also the Executive Summary, including an Illustrative Example, and Presentation.

Background

Investment-grade bond optional redemption provisions, and the calculation of the make-whole redemption price, can vary by issuer and by the methodology used by the investment bank assisting with such calculation. This variation in language and calculation results in a lack of standardization in the manner of calculating the redemption price. As a result, market participants have expressed the desire for standardized language in investment-grade bond optional redemption provisions.

In many make-whole calculations, a reference United States treasury security is selected by the issuer with the assistance of an investment bank. In others, a United States treasury constant maturity as published by the Board of Governors of the Federal Reserve System (a “Treasury constant maturity”) is used. In both cases, a ‘make-whole’ spread that was established at the time of initial pricing of the issue is added to the yield of the selected treasury security or Treasury constant maturity, and the resulting yield is used to discount the sum of the present values of the applicable remaining scheduled payments of principal and interest to the redemption date. The yield of the reference United States treasury security or Treasury constant maturity is most commonly referred to as the “Treasury Rate.”

In existing optional redemption provisions, there are variations in the method for selection of the United States treasury security or the Treasury constant maturity and the related yield. Many current provisions use a “comparable treasury issue” selected by an independent investment bank in accordance with “customary financial practice in pricing new issues” of corporate debt for determining the Treasury Rate. Ambiguity over which treasury is “comparable” and what is “customary” may result in different investment banks selecting different reference treasuries and yields.

To promote consistency and clarity for the benefit of both issuers of corporate debt as well as the holders of such debt, the SIFMA working group focused on the Treasury Rate definition, and considered, among other things, the optimal source and method of selecting and calculating the Treasury Rate, including the role of the independent investment bank. The SIFMA working group also considered additional changes to existing provisions.

The resulting model provision provides issuers, investment banks, investors, and other market participants with certainty and specificity in the calculation of the redemption price of bonds being redeemed.