Make-Whole Premium
Private Credit glossary · Loan Structures & Instruments
Definition
Prepayment penalty designed to compensate the lender for foregone interest if the loan is prepaid before the call-protection schedule expires. Calculated as the present value of remaining scheduled coupons discounted at a Treasury rate plus a small spread (e.g., T+50 bps). More common in mezzanine and second-lien structures than in floating-rate first-lien TLBs, where a simpler step-down schedule (102/101/par) typically applies.
Make-Whole Premium in plain English
When a lender makes a loan, they're counting on years of interest payments; if the borrower pays the whole thing back early, all that future interest vanishes. A make-whole premium is a fee that pays the lender back for that lost interest, so they're made "whole" — calculated by adding up the interest payments they would have earned and figuring out what that stream is worth in today's dollars. It's like booking a hotel room for a week: cancel on day one and they still charge you for much of the stay, because they'd planned on that income. These fees show up mostly in riskier loan types; safer first-lien loans usually just use a simple, shrinking penalty like 2%, then 1%, then nothing.
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