What is an MFN provision?

An MFN provision is a contract clause that ensures equal treatment. You could also refer to it as a “non-discrimination clause.” For example, businesses would routinely try to include MFN provisions in their supplier contracts ensuring that they receive pricing equal to or better than other customers. Of course, it is difficult, not to say, hardly possible to verify compliance with MFN provisions, for example, due to confidentiality provisions.

In leveraged finance, MFN provisions are most relevant in the context of the incurrence of incremental debt.

In exchange for the permission to incur additional debt, lenders often request protection through an MFN clause which ensures that the all-in yield under the existing facilities is increased if the all-in yield under the incremental debt exceeds the all-in yield under the existing loans by a certain spread. The all-in yield usually includes margin, interest rate floors, upfront or similar fees or original issue discount but excludes arrangement, commitment, underwriting, structuring, syndication or other fees payable in connection with the incremental facility. The scope, exceptions from and the limitations of MFN provisions vary widely and are often heavily negotiated on financing transactions.

MFN provisions usually fall away after a certain sunset period (usually, 6-18 months). The underlying assumption is that market conditions may no longer be the same after the sunset period, which makes the comparison between the pricing terms of the exiting and the incremental debt somewhat inept.  

The term “most favourite nation” clause has its origin in international trade law. More details on its history are, for example, here.

Maria C. Schweinberger