Most Favored Lender (MFL) Protection
Most Favored Lender, or MFL, protection is a credit-agreement provision that can require an increase in the pricing of existing term loans when specified new pari passu debt is issued at a materially higher all-in yield.
MFL protection limits pricing discrimination among similar debt
Incremental facilities let borrowers add new debt after closing. Without protection, a borrower could issue new pari passu term debt at a materially higher yield while leaving existing lenders at the old lower price.
MFL provisions reduce that risk by linking the economics of qualifying new loans to the existing tranche.
The permitted yield differential matters
Current 2026 agreements commonly use a 50-basis-point cushion in examples, but that figure is negotiated.
If new debt is only modestly more expensive than the existing tranche, no adjustment may be required. Once the permitted differential is exceeded, the existing pricing can increase by the excess.
All-in yield is broader than the stated margin
MFL calculations can include interest margin, OID, upfront fees and rate floors.
A new loan with the same margin but a deeper OID can therefore have a higher all-in yield and potentially trigger protection. Arrangement and underwriting fees paid only to arrangers are often excluded.
Sunsets and carve-outs can narrow the protection
Recent credit agreements show MFL protection expiring after a stated period such as 12 months. Other exclusions can apply to acquisition financing, longer-dated debt or specified facility types.
The lender must therefore ask not merely whether an MFL clause exists, but whether the proposed debt actually falls inside it.
MFL protection is most valuable when the borrower can add large pari passu tranches
Assume an existing $800 million term loan has a 7.00% all-in yield. The borrower later wants to add $300 million of equal-priority incremental debt. If the new tranche clears at 8.25% and the MFL cushion is 0.50%, the existing loan may need a 0.75% pricing increase if the debt is covered by the clause.
That adjustment can raise annual cash interest on the existing tranche by roughly $6 million.
The protection therefore matters most when the borrower has substantial incremental capacity and market conditions allow new debt to price materially wider than the original facility.
Common mistakes
Treating MFL as permanent Many provisions sunset.
Comparing only interest margins OID and floors can matter.
Assuming every incremental loan triggers it Carve-outs can exclude substantial categories of debt.
Example
Existing Term B loans have an all-in yield of 7.00%. The borrower issues qualifying incremental Term B debt at 8.00%, and the agreement permits a 0.50% differential. If no exception applies, the existing loans may need to be repriced to approximately 7.50% so the remaining gap is 0.50%.
Example
Existing Term B loans have an all-in yield of 7.00%. The borrower issues qualifying incremental Term B debt at 8.00%, and the agreement permits a 0.50% differential. If no exception applies, the existing loans may need to be repriced to approximately 7.50% so the remaining gap is 0.50%.
Professional note
MFL protection is only as strong as its scope. Review the permitted yield differential, sunset period, maturity exceptions, acquisition carve-outs, definition of all-in yield and whether OID or floors can trigger an adjustment.
Related terms
- Original Issue Discount (OID)
Original Issue Discount, or OID, in a loan financing is the discount between a loan’s stated principal amount and the amount paid by lenders when the debt is originally issued.
- SOFR Floor
A SOFR floor is the minimum SOFR value that a credit agreement uses to calculate interest on a floating-rate loan, even when the applicable SOFR reference rate falls below that contractual minimum.
- Incremental Facility
An incremental facility is additional term-loan or revolving-credit capacity that a borrower can add under an existing credit agreement, subject to the agreement’s specified limits, lender participation and conditions.
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