United States: The Redemption 'Make Whole' Remedy Controversy - An Easy Fix

The new year has brought an unexpected controversy in an otherwise very issuer-friendly high yield bond market, one involving limiting the available remedies following default that were expanded in last year's decision by the Southern District of New York in Wilmington Savings Fund Society, FSB v. Cash America International Inc. The court in Cash America held that when a default is caused by voluntary actions of the issuer and the issuer has the ability to make the applicable redemption payment, a bondholder may pursue a remedy of specific performance of the redemption provisions of the indenture for the payment of the applicable redemption premium.

Prior to Cash America, most market participants believed that such a remedy would only be available where an issuer intentionally defaulted for the purpose of avoiding paying the redemption premium (under the reasoning set forth in Sharon Steel Corp. v. Chase Manhattan Bank NA, 691 F.2d 1039 (2d Cir.1982)). After Cash America, an issuer financially capable of refinancing bonds and paying the redemption premium that defaults under an indenture other than by reason of an involuntary default (e.g., a bankruptcy or insolvency default, judgment default, cross default, or loss of collateral or guarantees) can be compelled to redeem the bonds and pay the applicable redemption premium.

In response to this extension of the redemption premium remedy, issuers have recently attempted (successfully, in certain instances) to include language in indentures that eliminates the redemption premium remedy — but not only in circumstances when there is no bad faith. This new language would eliminate the redemption premium remedy even where an issuer intentionally breaches for the express purpose of avoiding paying the redemption premium. It is this "land grab" by issuers that ignited last week's kerfuffle.

The reaction to the new language by high-yield investor constituencies is difficult to describe as measured: "If investors do not rapidly start rejecting these deals, it is the beginning of the end of bond covenants," announced Adam Cohen, founder of Covenant Review, which has successfully staked out for itself the role of vigilant gatekeeper of high yield bond covenants (much to the chagrin and at times fury of issuers and underwriters and their counsel). As if on cue, prominent counsel representing issuers and underwriters pooh-poohed the concerns raised by Covenant Review, claiming that the new language could not be expected to have a practical impact on issuer behavior. Their reasoning, though, is rather disarranged: "companies rarely intentionally default" — true enough but now that the new language provides a compelling economic incentive to do so, it is not hard to imagine an aggressive sponsor doing so; and "[D]oing so triggers a number of negative consequences for the issuer, including cross defaults in other debt, cross defaults in hedges, leases and other financial obligations, supplier retraction of credit, going-concern qualifications in financial statements and loss of shelf registration eligibility" — again, this ignores the intentional nature of the breach. If the issuer simply arranges committed take out financing for the bonds in advance of the planned breach, it could obtain cross default waivers (which would quite likely be obtainable on reasonable terms), and there would be no supplier contraction of credit or going-concern qualification because the issuer's credit would be unimpaired. Finally, for the majority of sponsor portfolio companies in this era of 144A-for-life distribution that are not SEC reporting companies, the spectre of loss of shelf registration availability is obviously a non-event. Lastly, the cudgel of injunctive relief was raised, but without any explanation as to why the availability of money damages would not be sufficient to defeat such a claim for such relief.

If the goal is to return to the post-Sharon Steel, pre-Cash America status quo, it seems the fix is rather simple: A scaled-down version of the controversy-provoking new language that retains protection against bad faith breaches. For example:

"Notwithstanding any other provision of the indenture or the notes, Holders of the notes shall not be entitled to specific performance of the optional redemption provisions described under 'Optional Redemption' above, and no premium will be due or available as a remedy (and no damages or remedy shall be payable that are based on the loss of or deprivation of the amount of any such premium), in each case in connection with or following (x) any Default or Event of Default other than a Default or Event of Default resulting from an intentional breach of the terms of the Indenture with the purpose of avoiding the payment of such premium or (y) any acceleration of all, or any portion of, the notes (other than an acceleration in respect of an Event of Default (1) resulting from an intentional breach of the terms of the Indenture with the purpose of avoiding the payment of such a premium or (2) for failing to pay the redemption price when due following any election to redeem notes pursuant to the optional redemption provisions described under 'Optional Redemption' above, to the extent any premium is due as part of the redemption price".

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions