A callable bond is typically only callable on the
anniversary date of the bond or coupon date. However, this is not a requirement
as the bond indenture is an individual contract specific to that particular
bond issue. A common reason bonds are issued is to finance the acquisition of
another company. These bonds are generally callable if the deal falls through
and the call price is often set at 101 percent of par. Bondholders can be hurt
by this fixed price call provision as bond prices can rise in the intervening
period between bond issue and the deal being terminated. For
example, when Sysco’s bid to buy US Foods feel through last year,
bondholders lost $309 million as the bonds were called at 101, well below
current market price, which had reached as high as 113.3. Now, major
bondholders are pushing to change the call value of bonds issued to fund
acquisitions to a make-whole call premium, which commonly used for bonds issued
for purposes other than acquisitions.
