Banks Sell Hung Debt With Promise They Won’t Undercut Investors

Some banks stuck with billions of dollars of buyout debt on their balance sheets are using what was once a run-of-the-mill clause to get leveraged loan investors to bite.

The so-called most-favored-nation clause, also known as MFN, ensures one client isn’t treated differently from others. The provision has typically been used by borrowers seeking to raise extra cash, but is now being used by lenders selling underwritten buyout debt to investors for a discount, according to people familiar with the matter. The MFN prohibits the banks from selling on the rest of the financing for an even steeper discount, giving ...