While traditional fixed-price call provisions also cap the price of a successful tender offer, make-whole call provisions are a superior mechanism for improving financial flexibility for several reasons.
The willingness of firms to incorporate make-whole call provisions in new debt issues indicates that the perceived benefits of increased financial flexibility more than make up for the call provision's up-front cost.
We begin with the standard structure of a frictionless economy where call executions are endogenous, only occurring when call provisions are in-the-money.
Thus, the conclusions are likely to hold even when bond call provisions contain call premiums.
However, in practice most call provisions require that bonds be redeemed at par plus a call premium, which is typically equal t one year's interest and may decline over the life of the bond according to a prearranged schedule.
The pricing of this transaction certainly validates CS First Boston's ideas of the value of our July issue, and it sets a standard in call provisions for TVA's long-term securities," said TVA Chief Financial Officer William F.