A most favored nation (MFN) clause is a provision in a credit agreement that ensures that the borrower will receive the best terms that the lender offers any other borrower under similar circumstances. MFN clauses are commonly found in loan agreements, bond indentures, and other credit facilities and are often used by lenders to incentivize borrowers to accept less favorable terms than they might otherwise be able to obtain.
Under an MFN clause, the borrower is entitled to receive the same or better terms as any other borrower under similar circumstances. This means that if the lender offers a lower interest rate or more favorable covenant package to another borrower, the borrower with the MFN clause will receive the same or better terms. In most cases, the MFN clause is triggered if the lender offers more favorable terms to another borrower within a specified time frame.
One of the benefits of an MFN clause is that it can help to level the playing field for borrowers. If a lender offers more favorable terms to one borrower, the MFN clause ensures that other borrowers receive the same treatment. This can help to prevent lenders from playing favorites and can help to ensure that borrowers are treated fairly.
However, MFN clauses can also be a double-edged sword. If a lender is forced to offer the same or better terms to all borrowers, it may be less willing to offer favorable terms in the first place. This can make it more difficult for borrowers to negotiate favorable terms, particularly if they are in a weaker bargaining position.
Overall, MFN clauses can be a useful tool for borrowers and lenders alike. However, they should be used with caution and should be carefully negotiated to ensure that they are not overly restrictive or disadvantageous to either party. If you are considering an MFN clause in your credit agreement, it is important to work with an experienced attorney to ensure that the clause is structured in a way that meets your needs and protects your interests.