Clifford Chance
How Soft is Your Soft Call?
11 April 2016
Call protections are designed to protect lenders' yield in the event of a repayment of debt before maturity. Depending on their scope and limitations, call protections are often characterized as "hard" or "soft." "Soft call" provisions, which are common in institutional syndicated credits, typically require payment of a one percent premium upon the "refinancing" or "repricing" of the loan within a certain period after closing that reduces the lenders' effective yield. "Hard call" provisions, in contrast, which are common in riskier credits, typically require payment of a one-to-three percent premium without discriminating as to the nature and effect of the subject prepayment. While designed to ensure that lenders receive the benefit of their bargained-for economic return, the actual reach of soft call provisions varies widely from one transaction to the next. In the current volatile leveraged loan environment, lenders should pay more attention to the terms and application of prepayment premiums, as widening margins make it more likely that sponsors and borrowers will be looking for the earliest opportunities to refinance into less expensive loans.
