Private Credit Deep Dives – Call Protection

"Call protection" (which you may also hear referred to variously as a "prepayment fee", "prepayment premium", "call premium", "prepayment penalty", "non-call", "hard call", "soft call" or "make-whole") is a core economic term on leveraged financings. The underlying premise behind the concept is that, having advanced a loan, a lender should have contractual assurance that it will earn the agreed level of yield on that loan for a certain period of time after closing (and that it will not be permitted for the borrower to prepay the loan the following day, for example, thus depriving the lender of substantially all the interest income it expected to earn when executing the transaction). Lenders will most acutely feel the risk of being prepaid early on a transaction when they fear a near-term decline in interest rates. Currently the bank-driven credit markets remain unsettled, and there is an acknowledgement from market participants that the levels of pricing for new