The interest the company expected to avoid was not actually there.

The situation

A significant judicial tax recovery was about to land in the company’s account. The plan was straightforward and intuitive: use it to retire the most expensive debt in a portfolio of sixteen facilities, and book the interest saved. A figure for that saving had already been presented internally and put into a slide.

What the numbers showed

The figure was nominal, undiscounted, and ignored prepayment penalties entirely. Rebuilt properly, the portfolio told a different story:

• Three of the lenders used make-whole clauses that discount remaining flows at approximately the same rate the cash would earn if left invested. Against that alternative use of cash, prepayment is close to NPV-neutral rather than value-creating.
• One contract carried a punitive fixed monthly penalty that made prepayment NPV-negative outright.
• That same contract contained an acceleration clause triggered by requesting renegotiation with any creditor — meaning the act of opening a conversation elsewhere in the portfolio could accelerate it.
• The right ranking criterion was not headline interest rate but future interest avoided per unit of cash deployed, which demoted several facilities that looked expensive but were close to maturity.
• The taxability of the recovered principal had not been assessed, and could reduce the net cash available materially below the figure being planned against.

The decision

Prepay selectively, and for the right reasons: covenant protection, collateral release and guarantee release — not interest savings, which were not there.

What changed

A plan built on a number that would not have held was replaced with one built on a number that did, and a covenant risk that nobody had priced was surfaced before it was triggered.

What this engagement was not

Not a tax opinion. The treatment of the recovered principal was flagged for the company’s tax counsel, not resolved by us.

Anonymised at client request. Figures are stated as ranges or ratios where absolute values remain commercially sensitive.