“Most-Favored Nation” is a term in international agreements, under which trade terms offered one nation are made no less favorable than the trade advantages given any other nation. In other words, the recipient gets the best deal the granting nation affords.
The commercial lending analog is the “MFL,” or “Most-Favored Lender” clause. Such an arrangement provides, for example, if Lender #1 has an x% default interest rate, and Lender #2 has a higher rate with the same borrower, Lender #1 can use an MFL to have the benefit of the other lender’s higher rate. Or an MFL would allow Lender #1 to take advantage of Lender #2’s more favorable loan to debt ratios, more frequent or detailed reporting requirements, or any other material protection that the borrower had agreed to with its other lenders.
Lenders want MFL provisions for obvious reasons: They want to be on the same footing with the borrower's other lenders, and don't want to have to wait to declare a default, after other lenders have already done so.
Usually, an MFL clause will make it clear that the MFL is the contract between the borrower and the lender with the MFL, and that changes to the relationship between the borrower and its other lenders do not subtract from the Most-Favored Lender’s rights. For example, if Lender #1 waives defaults based on a given lender protection, the MFL lender’s rights are not waived, even though that default is based on the provisions of Lender #1’s loan documents.
This post was written by attorney Rick L. Knuth