How does a 'Most Favored Nation' (MFN) clause work for term loan add-ons?
Most Favored Nation (MFN) is a clause in the term loan: if the sponsor issues a new tranche (add-on) on more expensive terms — a higher coupon — the existing tranche is automatically lifted to the same pricing. MFN protects existing lenders from pricing erosion.
MFN works only upward (higher pricing on the add-on), not downward. If the sponsor issues a cheaper add-on tranche, the existing TLB coupon stays unchanged.
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An existing TLB of $200m at SOFR + 425 bps. The sponsor plans a $100m add-on.
| Scenario | Add-on coupon | Existing TLB coupon |
|---|---|---|
| Add-on at the same pricing | SOFR + 425 bps | SOFR + 425 bps (no effect) |
| Add-on at higher pricing | SOFR + 475 bps | SOFR + 475 bps (MFN triggers) |
| Add-on at lower pricing | SOFR + 400 bps | SOFR + 425 bps (no step-down) |
| Aspect | Standard MFN | "MFN sunset" |
|---|---|---|
| Duration | loan term | 12–24 months |
| Sponsor-friendly | less | more (free after sunset) |
An MFN sunset (12–24 months) is standard in the middle market — after that the sponsor has more room for add-ons under a Buy-and-Build.
Question: "Why does a lender accept an MFN sunset?"
Answer: "Protection from pricing erosion matters most in the early period — after that the lender has refi options anyway. The sponsor wants flexibility for an M&A roll-up. A typical compromise: 18 months of MFN, then a sunset"