If you’re exploring fixed-income investments in 2025, you’ve probably stumbled across the term “make whole call provision” in bond prospectuses. Once a niche clause, this feature is now front and centre as corporate and government issuers respond to shifting interest rates and regulatory updates. Whether you’re a seasoned investor or just building your portfolio, understanding make whole call provisions is vital for smart risk management and maximising returns.
What is a Make Whole Call Provision?
A make whole call provision allows a bond issuer to redeem the bond before its maturity date—but with a twist. Instead of simply paying back the principal or face value, the issuer must also compensate the bondholder for future interest payments they would have received. This “make whole” payment is calculated based on the present value of remaining coupons, discounted at a rate often tied to a relevant government bond yield plus a spread (known as the “make whole spread”).
For example, if an Australian energy company issues a 10-year bond with a make whole call provision, and decides to call the bond after 6 years, it must pay the present value of all remaining interest payments (years 7-10), discounted at the current Commonwealth Government Bond rate plus the agreed spread. This typically results in a premium above the bond’s face value.
Why Are Make Whole Calls Gaining Attention in 2025?
Several trends are pushing make whole call provisions into the spotlight for Australian investors:
- Rising Interest Rate Volatility: With the RBA’s monetary policy tightening and loosening in rapid cycles through late 2024 and into 2025, issuers are increasingly seeking flexibility in managing their debt loads.
- APRA’s Regulatory Guidance: Updates in 2025 clarify how banks and corporates should disclose call features, including make whole calls, in their debt prospectuses, aiming for greater transparency for retail and institutional buyers.
- Portfolio Risk Management: Asset managers are under pressure to stress-test bond portfolios, and provisions like make whole calls can cushion the blow if an issuer decides to refinance at a lower rate.
Recent Australian bond deals from sectors like infrastructure and utilities now routinely include make whole call clauses, reflecting a global trend towards more investor-friendly call structures.
How Do Make Whole Calls Affect Investors?
While make whole calls can offer a safety net, they also introduce unique considerations for buyers:
- Compensation for Early Redemption: Investors are less likely to face ‘reinvestment risk’ at an inopportune moment because the make whole payment mimics the value of the remaining interest.
- Pricing Complexity: Bonds with make whole calls often trade closer to their fair value, since the issuer’s cost of calling is higher than with a standard call option. However, estimating the make whole amount can be tricky, especially if market yields are volatile.
- Liquidity Impact: Because make whole calls are more protective of bondholders, these bonds may see tighter spreads and more active trading compared to similar bonds with standard calls.
For example, in 2025, a major Australian telecom company issued a $500 million bond with a make whole call provision at “government yield + 35 basis points.” When interest rates fell sharply, the company considered calling the bond. Investors were compensated fairly for the lost income, and secondary market prices reflected the expected make whole premium.
What to Watch For: Policy and Market Shifts in 2025
Several developments are shaping the landscape for make whole call provisions this year:
- Regulatory Oversight: ASIC and APRA are increasing scrutiny on how these provisions are disclosed to ensure investors understand the mechanics and risks involved.
- Changing Issuer Behaviour: As refinancing becomes more attractive in a falling rate environment, more issuers are expected to exercise make whole calls, particularly on longer-dated bonds issued in the high-rate era of 2023–24.
- Investor Strategy: Fixed-income funds are now actively screening for make whole call features to better estimate portfolio duration and expected yield, especially as market volatility persists.
For individual investors, it’s important to read the fine print and understand exactly how the make whole amount is calculated—look for the reference government bond, the spread, and the calculation agent.
Conclusion
Make whole call provisions are no longer an obscure detail—they’re a key consideration for Australian bond investors in 2025. With regulatory changes and market volatility on the rise, understanding how these clauses work can help you protect your returns and avoid surprises. Always review bond documentation carefully, and consider how make whole calls fit your overall investment strategy.
