1. Introduction
Most favoured creditor (“MFC”) clauses are structured as protections for lenders in loan agreements. MFC clauses have been integrated into credit relationships as a reflection of the most favoured nation (“MFN”) principle, which emerged to prevent discrimination and ensure equality in international trade, requiring a state to extend any privilege granted to a trading partner to all other trading partners.
It should be noted that MFC clauses are not only included in loan agreements; but they are also commonly included in various financial transactions such as bond issuances, fund investments as well as debt restructurings. However, this article focuses on the application of MFC clauses in commercial loan agreements.
2. MFC Clause and Its Purpose
In a credit relationship, MFC clause primarily aims to ensure the fair protection of a lender and prevent it from being subject to disadvantaged terms compared to other creditors of its debtor. In loan agreements including an MFC clause, the borrower undertakes to provide the same terms to the lender if it offers favourable terms to its other creditors in other loan agreements. In this way, the lender can equally benefit from the favourable terms granted by the borrower to its other creditors and prevent its credit risk from increasing unpredictably.
Additionally, MFC clauses serve the purpose of maintaining a fair and competitive structure in financial markets, promoting competition among creditors and contributing to the establishment of fairness in the marketplace.
3. Legal Structure of the MFC Clause
MFC clauses in loan agreements are not regulated as prohibitive undertakings, thus do not prevent borrowers from providing more favourable terms to their other creditors. Instead, these clauses are structured as undertakings regulating that if the borrower provides favourable terms to its other creditors, the same terms will also be extended to the creditor benefiting from the MFC clause.
Without being limited to the following, the scope of an MFC clause may be applicable to more favourable terms:
- in relation to a borrower’s all other financial indebtedness (including but not limited to bond issuances, derivative transactions, financial leasing transactions and any transaction having a similar effect of a commercial borrowing) or only in relation to its other loan agreements.
- in relation to loan agreements with similar maturity dates, amounts and security package, or, in relation to all loan agreements, without such limitations.
- in relation to loan agreements dated after the effective date of the loan agreement containing the MFC clause, or, without such a limitation, in relation to all previous or subsequent loan agreements of the borrower.
- in relation to all representations, undertakings, and events of default regulated in the loan agreement containing the MFC clause, or in relation to certain representations, commitments, and events of default, such as negative pledge, financial covenants, pari passu, and cross-default provisions.
In a loan agreement with an MFC clause, it is usually stipulated that if the borrower provides more favourable terms to another creditor, such loan agreement will be deemed automatically amended. However, in practice, the parties typically enter into a written amendment agreement in such cases.
4. Conclusion
MFC clauses, inspired by the MFN principle, which emerged to promote the liberalization of trade and ensure fair competition between countries, serve to protect the interests of creditors in loan agreements and ensure that they are entitled to equal rights with other creditors of the borrower. These clauses also aim to ensure fairness, equality, and transparency in financial markets, contributing to the continuous existence of a fair and competitive structure in these markets. As a result, the use of MFC clauses in loan agreements is becoming increasingly widespread.