Jefferies

Actionable Ideas for Companies and Sponsors

Credit Agreement Work-Arounds

The impressive strength of the high yield market is allowing issuers to put in place creative structures to work around Most Favored Nation (MFN) restrictions in their credit agreements. MFN covenants reprice the interest rate of an existing term loan higher in the event the company borrows at a rate higher than the defined threshold amount. One such work around was executed by PetSmart which recently issued secured bonds structured to not trigger the term loan’s MFN restrictions and therefore allowing PetSmart to not have to reprice their existing term loan. In addition, borrowers have also been addressing pending MFN restrictions by increasing the prevalence of sunsets defining when the protection expires, and in several recent deals borrowers have increased the yield thresholds before MFN limitations kick in.