The make-whole and Canada-call provisions: A case of cross-country spillover of financial innovation

Zvika Afik, Gady Jacoby, David Stangeland and Zhenyu Wu

Journal of International Financial Markets, Institutions and Money, 2019, vol. 61, issue C, 120-127

Abstract: Almost all North American callable corporate bonds carry a make-whole call option. We trace the evolution of the US make-whole callable bond to the Canada-call that predates it by over eight years. This cross-country spillover of financial innovation continued at a slow pace. Six years after the US market initial adoption of make-whole bonds, AT&T introduced it to Europe. More than 10 years later, large European firms started issuing this financial instrument. The benefits and optimal exercise of the make-whole call provision are described. We provide a simple analysis that indicates the possibility for the optimal exercise of the make-whole call even when traditional analysis suggests a negative NPV of calling and refinancing the bond. Given the possibility of optimal exercise even when the make-whole call is seemingly out-of-the-money, we demonstrate how the effect of incentive alignment between stockholders and bondholders lowers the issuer’s cost of including a make-whole call provision below the issuer’s expected benefit of having the option to utilize such provision.

Keywords: Callable bond; Canada call; Doomsday call; Make-whole call (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:61:y:2019:i:c:p:120-127

DOI: 10.1016/j.intfin.2019.02.004

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