When a private equity firm buys a new business, it rarely stops there. Instead, the company builds impulses around its new holding company like a snowball that degrades, expands and expands its business through additional acquisitions of complementary companies. But to do that, you need capital. Fortunately, credit facilities generally contain incremental provisions (or “accordion”) that allow borrowers to finance complementary acquisitions under existing financing agreements. While many borrowers seize this opportunity, there are many factors to consider before doing so, particularly with respect to the so-called Most Favored Nation (MFN) provisions that apply to incremental credit facilities. In most cases, a particular credit contract has only a few of these exceptions. In the case of promised financing, MFN exemptions are often subject to a “market reflex,” allowing arrangers to modify or remove exceptions to the MFN to facilitate syndication of underlying debt. Looking more closely at the provisions of the AML, there are some themes that are common to most incremental facilities clauses, such as the inclusion of maturity restrictions (which may not be within the maturity date of the equivalent existing facility) and amortization profiles (incremental facilities should present margin repayment profiles, unless the amortization profile has a weighted average life of at least the equivalent existing amortization mechanism) that follows the current market. However, in some cases, the market has continued to move for a long time. Below are some of these provisions. 1 These pre-emption rights may be prohibited if the ACF`s proposals come into effect in its October 2016 “Investment and Corporate Banking: Prohibition of restrictive contractual clauses” (CP16/31). It is perhaps not surprising that the terms of the DFN provisions are often one of the most negotiated components of a credit facility, lenders wishing to apply MFN to all incremental debts and borrowers seeking to limit its application as much as possible. While it is generally true that the provisions of the MFN are triggered when the overall return on the new Pani Passu debt tranche exceeds the total proceeds of the existing debt, there may be exceptions and restrictions.
Some are the most common: the application of the DFN provisions varies from agreement to agreement in terms of the size, duration and type of debt to which they apply. An experienced borrower will fully understand the circumstances under which the financing of an add-on could trigger the protection of the MFN`s credit facility and possibly lead to a revaluation of the existing debt.