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What is a 50 basis point MFN actually worth to an existing lender?

The most-favoured-nation clause does not restrain the new debt; it reprices the old.

Julian R. Sterling · from How to Read a Credit Agreement

An MFN provision does not stop a borrower raising expensive debt. It reprices the loan already outstanding. On a €137.5 million unitranche facility at E + 550, incremental debt of €13.90 million priced at E + 750 opens a gap of 200 basis points. A 50 basis point MFN closes it: the existing margin steps to E + 700, and annual interest rises from €11.00 million to €13.06 million — €2.06 million a year to the existing lenders.

Worked in full in How to Read a Credit Agreement by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →

The gap, the cushion and the step-up

A most-favoured-nation provision has three moving parts: the margin on the new money, the margin on the loan already outstanding, and the cushion the clause allows between them. Kestrel Industrial, a mid-market manufacturer funded with a €137.5 million unitranche facility, carries an MFN of 50 basis points with a 24-month sunset.

In Q6 the borrower raises €13.90 million of incremental debt at E + 750. The margin on the existing facility at that date is E + 550. The gap is 200 basis points, which exceeds the 50-point cushion, so the existing margin steps up to E + 700 — the new margin less the cushion.

The MFN adjustment on a €137.5 million unitranche when incremental debt is raised at E + 750.

Item	Before	After MFN adjustment
Existing margin	E + 550 bps	E + 700 bps
Annual interest on €137.5 m	€11.00 m	€13.06 m
Increase	—	€2.06 m a year

The repricing is sized by the loan that is already there, not by the loan being raised. €13.90 million of new debt moves the cost of €137.5 million of old debt. An MFN is therefore worth far more to a lender than the incremental facility it polices, and the borrower's true cost of incremental money is its own coupon plus the repricing of everything already drawn.

The sunset is the whole negotiation

Kestrel's MFN expires after 24 months. After that date the borrower may raise incremental debt at any price and nothing happens to the existing margin. Twenty-four months is a compromise. Six or twelve months is aggressive, and it removes the protection for exactly the period of the facility in which most incremental debt is actually raised.

With 5 years to run at the point of the raise, the difference between a 24-month sunset and a 12-month one is worth roughly €8.25 million of interest to the existing lenders. Nothing in the clause changes except a date, and the date is settled late, in a mark-up, by people who have not run the arithmetic.

How much debt can arrive without consent

Existing lenders may participate in an incremental facility. They are not obliged to, and they cannot usually stop it. Kestrel's incremental capacity is the greater of €12.5 million and 50 per cent of Consolidated EBITDA, plus an unlimited amount subject to a leverage test at the opening level. A lender that underwrote a facility at 4.51 times can find itself lending into a materially different capital structure without having agreed to anything.

The incremental basket is the greater of €12.5 million and 50 per cent of Consolidated EBITDA. At Q9 the percentage limb is worth less than the floor.

Test date	Consolidated EBITDA	Incremental capacity
Q1	€29.2 m	€14.60 m
Q9	€20.0 m	€12.50 m
Q28	€36.6 m	€18.30 m

The direction of travel matters. The grower is largest when trading is strong and collapses to its fixed floor when trading is weak, so the euro amount, not the percentage, is the number that survives a downturn. It is also the number a borrower reaches for when it needs new money most and the terms on offer are worst — which is when the MFN, if it is still alive, does its work.

What to check, and in what order

The provision is four lines of drafting and it is read in about ten minutes.

• The cap: fixed, grower or ratio-based, and what the grower is worth at the low point of the plan rather than at completion — €12.50 m at Q9 against €14.60 m at Q1 here.
• The MFN itself: how many basis points of cushion, and what it produces in cash if it is triggered. On this facility, €2.06 million a year.
• The sunset: the date after which the provision stops applying, and how much of the remaining term sits beyond it.
• The carve-outs: MFN commonly does not apply to incremental debt below a threshold amount, to debt maturing after the existing facility, or to debt incurred to fund an acquisition. Each is a hole, and together they can leave the provision applying to almost nothing.
• The ranking: whether incremental debt may rank ahead of the existing facility.

An MFN is not a restriction on the borrower raising expensive debt. It is a repricing of the old loan when the borrower does, and its value is set by the size of that old loan, the width of the cushion, and how long the clause survives. On Kestrel all three are known at signing, and the answer — €2.06 million a year, for 24 months — can be written on the term sheet before anyone argues about it.

Questions readers ask

What is a typical MFN sunset in a credit agreement?

Twenty-four months is the market compromise; six or twelve months is aggressive and removes the protection over the period in which most incremental debt is raised. With 5 years left to run, a 24-month sunset against a 12-month one is worth roughly €8.25 million of interest to the existing lenders.

Can existing lenders block an incremental facility?

No. They may participate but are not obliged to, and they cannot usually refuse it. A standard cap is the greater of €12.5 million and 50 per cent of Consolidated EBITDA — €14.60 million at completion — plus an unlimited amount subject to a leverage test set at the opening level of 4.51 times.

Does MFN protection apply to every incremental facility?

Rarely. MFN commonly does not apply to incremental debt below a threshold amount, to debt maturing after the existing facility, or to debt raised to fund an acquisition. Each carve-out is a hole, and together they can leave a clause worth €2.06 million a year applying to almost nothing.

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