hard · Corporate Credit Analysis ratings
A BB-rated issuer's syndicated Term Loan B closes with a 'most favored nation' (MFN) sunset provision: the 50 bps MFN protection expires 18 months after closing.
Holding all else equal, what is the primary economic consequence of this sunset for the EXISTING Term Loan B lenders, and through what mechanism does it manifest?
- After the sunset, the borrower can raise incremental pari passu debt at a higher spread without triggering a repricing of the existing tranche, eroding the existing lenders' relative-value protection against spread widening.
- The sunset accelerates the existing loan's maturity by 18 months, forcing lenders to refinance into the incremental facility at then-current market spreads.
- After the sunset, the borrower may issue incremental debt priced more than 50 bps above the existing loan without compensating existing lenders via a yield increase, so existing lenders bear repricing risk if market spreads widen.
- The sunset converts the MFN into a permanent 50 bps floor on all future incremental debt, guaranteeing existing lenders a yield uplift on any subsequent issuance.
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