Discount the margin saved over the loan's expected life, not its maturity, then price the option of waiting for the soft call to fall away.
Compare the present value of the margin saved over the loan's expected remaining life with the 101 premium plus the costs of the repricing, and then with the same saving taken after the soft call expires. On an illustrative $500m term loan repriced from S+375 to S+325, the $2.50m a year saved is worth $6.65m over an expected three years, against $6.75m of costs including the $5.0m soft call premium: repricing now loses $0.10m. Waiting the four months until the soft call falls away turns the same deal into a gain of $4.12m, and stays better unless the market moves against the borrower by more than 36 basis points.
Worked in full in How to Read a Credit Agreement by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Most leveraged term loans carry a 101 soft call: for six months (sometimes twelve) after closing, any “repricing transaction” that lowers the loan's yield costs the borrower 1 per cent of the principal repriced. The definition usually catches both an amendment that cuts the margin and a refinancing with cheaper debt, and lenders who refuse an amendment and are replaced are paid the premium too. When markets tighten soon after a deal closes, the sponsor's first question is whether a repricing pays for the premium. The second question, which matters more, is whether to wait.
| Input | Value |
|---|---|
| Term loan outstanding | 500.0 |
| Current margin over SOFR | 375bp |
| Margin achievable today | 325bp |
| Soft call premium on the amount repriced | 1.0% |
| Months until the soft call expires | 4 |
| Arranger fee on the repricing | 0.25% |
| Legal and other costs | 0.5 |
| Expected remaining life (refinanced or repaid on exit) | 36 months |
| Discount rate, the borrower's cost of debt | 8.0% |
The expected life matters more than the maturity. A seven-year loan in a sponsor deal is usually refinanced or repaid on exit well before it matures, and the saving stops when it is.
Saving = 500.0 × 50bp = $2.50m a year, or $0.208m a month
Costs = soft call 500.0 × 1.0% = 5.0 + arranger 500.0 × 0.25% = 1.25 + legal 0.5 = $6.75m
PV of savings = 0.2083 × annuity factor (36 months at 8.0% ÷ 12) = 0.2083 × 31.912 = $6.65m
NPV = 6.65 − 6.75 = −$0.10m
Excel: =PV(8%/12,36,-TL*Cut/12)-(TL*(Premium+ArrFee)+Legal)
Undiscounted, three years of savings come to $7.50m, which is why a quick look says yes. Discounted, the deal needs 37 months to pay back, one more than the borrower expects to have the loan. The break-even margin cut is 50.8bp: 50 is just short.
Savings start in month 5 and run to month 36: annuity factor 27.978, PV = 0.2083 × 27.978 = $5.83m
Costs without the premium = 1.25 + 0.5 = $1.75m, paid in month 4: PV $1.70m
NPV = 5.83 − 1.70 = $4.12m, better than repricing now by $4.23m
Waiting gives up four months of savings, $0.83m, to avoid a $5.0m premium. Without the premium the repricing pays back by month 13, and a cut of only 14.6bp would cover its costs over the 32 months left after waiting.
The reason borrowers sometimes pay the 101 is that the window may shut. If spreads widen while the borrower waits, the margin available in four months may be higher than 325bp. Solving for the cut that makes waiting exactly as good as repricing today: the borrower only needs a cut of 13.7bp after the soft call, a new margin of about 361bp. The market would have to move 36.3bp against the borrower in four months before paying the premium becomes the better choice.
| Margin cut | 24 months | 36 months | 48 months |
|---|---|---|---|
| 25bp | −4.45 | −3.43 | −2.48 |
| 50bp | −2.14 | −0.10 | 1.78 |
| 75bp | 0.16 | 3.22 | 6.05 |
Paying the premium works for a large cut on a loan the borrower expects to keep. For a 25bp tightening it never pays inside four years, and those are exactly the small post-closing tightenings that tempt a sponsor to move early.
Comparing the premium with the saving over the loan's full maturity, undiscounted. Seven years at $2.50m is $17.5m against $6.75m of costs, a comfortable yes, on a loan that will probably be repaid in three. The second mistake is reading only the premium percentage and not the definition of “repricing transaction”: some agreements apply the premium only to amendments whose primary purpose is to reduce the yield, others to any refinancing, and some exclude repricings made in connection with a change of control or a transformative acquisition. Which applies decides whether the $5.0m is payable at all.
From the lender's side the same 101 is the compensation for losing yield early. How much it adds to the lender's return depends on when repayment happens, which is the subject of how much call protection adds to a loan's yield.
Price a repricing as PV of margin saved over the expected life less premium and costs, then price waiting. Here repricing now is a $0.10m loss, waiting four months a $4.12m gain, and waiting stays ahead unless spreads widen by 36.3bp. The free workbook for this case runs the Kestrel facility, margin ratchet included, through all twenty-eight quarters.
A premium of 1 per cent of the principal payable if the borrower reprices or refinances the loan at a lower yield within a set period after closing, usually six months. On a $500m term loan it is $5.0m, and it is also paid to lenders who refuse a repricing amendment and are replaced.
Divide the total costs by the PV of one basis point a year over the expected life. With $6.75m of costs, a $500m loan and a 36-month life at 8.0 per cent, the break-even is a 50.8bp cut. Without the premium, only $1.75m of costs remain and the same 36-month life needs just 13.2bp.
Usually, if it expires soon. Waiting four months gives up $0.83m of savings to avoid a $5.0m premium; in the example the NPV improves from minus $0.10m to $4.12m. Waiting is worse only if spreads widen enough that the cut available later falls below 13.7bp.
This article is one calculation from How to Read a Credit Agreement. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
Get the book on Amazon →Free companion files
Also on Amazon UK · Amazon Germany · Amazon France · Amazon Canada
Reading guide: credit, private credit and distressed debt → · All 1614 articles →
If this book helped, or didn’t, a few lines on Amazon are worth more than they look: they are what the next reader goes on. Write a review. The workbook stays free either way.