hard · Private Credit loan-structures-instruments
A middle-market credit agreement contains a $25m incremental 'free-and-clear' (fixed-dollar) basket plus a ratio-based incremental capacity governed by a 4.0x first-lien net leverage test, with an 'MFN' (most-favored-nation) protection of 50bps and a 12-month MFN sunset. The borrower wants to raise $40m of new pari first-lien debt at a spread 75bps above the existing loan.
Which sequencing of basket usage lets the borrower raise the full $40m while LEAST triggering the existing lenders' MFN yield-protection — and why?
- Draw the full $40m under the ratio basket after the 12-month sunset expires, because ratio-based incremental debt is categorically exempt from MFN regardless of timing
- Allocate $25m to the free-and-clear basket and $15m to the ratio basket simultaneously at close, because splitting the tranche this way halves the applicable MFN spread to 37.5bps
- Wait out the 12-month sunset and raise all $40m thereafter, because MFN protection lapses entirely at sunset and the 75bps premium then triggers no repricing of the existing loan
- Raise the $40m before sunset using the free-and-clear basket first, because fixed-dollar baskets are contractually carved out of the MFN definition while ratio-based incremental debt is not
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