The borrower is seeking $300m to fund an acquisition. It has proposed structuring the debt as an add-on to a roughly $5bn unitranche loan due in August 2025, which dates back to its 2019 buyout by Harvest.

The original loan was raised from a group of private credit firms; it has been subsequently upsized and is among the largest unitranche deals ever. Owl Rock is agent on the facility.

Integrity has proposed a 2027 maturity for the add-on, with a springing maturity to 2025 if the existing facility is not extended before maturity (the borrower is not currently proposing an extension, sources noted).

The company has also proposed raising the funds through a new cash flow revolver.

The problem for lenders is that both of these options might not trigger MFN protection.

Some of the company’s existing lenders are holding discussions with lawyers at Latham & Watkins (which was lender counsel on the initial unitranche deal) to review their rights and options in light of Integrity’s proposals, sources said.

Favorable treatment

In leveraged loan credit agreements, the MFN clause (the acronym stands for ‘Most Favored Nation’) is designed to protect lenders when borrowers raise new debt that offers significantly higher returns.

The protection is triggered if the borrower raises new debt with pricing that is a certain number of basis points wider than that of its existing debt. If it triggers the MFN clause, the borrower must offer lenders compensation, typically by increasing their coupon.

Integrity’s existing unitranche was issued back in 2019, when borrowing costs were much lower than they are today; it pays a coupon of Libor + 575bps.

The company has proposed setting the coupon on the add-on at around SOFR + 650bps with a 97 OID.

This is significantly higher than the existing loan. But by giving the add-on a longer tenor, Integrity could potentially skew the MFN calculation in its favor and thus reduce the overall cost impact of the new debt raise, sources said.

Raising the new debt as a revolver might also achieve a similar end result, the sources added.

Integrity is a Dallas-based distributor of health and life insurance and associated products. It has been majority owned by Harvest since 2019, and attracted a $1.2bn investment from Silver Lake last year.

Harvest and Owl Rock declined to comment. Latham and Integrity did not respond to requests for comment.

Wide impact

At around $5bn, Integrity’s unitranche loan has grown substantially since its initial $945m issue size. As such, if Integrity were to avoid triggering the MFN it could avoid tens of millions of dollars in additional interest costs, sources noted.

By the same token, the loan’s size also means it is widely held among private credit firms, so this would mean a relatively large number of counterparties could potentially miss out on a substantial coupon bump.

“With a $5bn unitranche, it’s a private but it’s effectively a syndicated deal,” said one source familiar with the situation.

More situations like this could arise in the private credit market as the cost of borrowing rises, sources said.

Another Harvest portfolio company, Galway Insurance, is exploring raising new debt via a secured bond issue, which could also potentially avoid MFN protection in its Antares Capital-led unitranche, according to sources.

Antares and Galway did not respond to requests for comment. Harvest also declined to comment on this situation.

Finding loopholes in credit agreements is nothing new: the classic example is J. Crew in the late 2010s, and the recent saga around Envision Healthcare has provided a reminder of how such maneuvers can impact lenders.

But this dynamic is less common in private credit, where lenders tout their strong relationships with borrowers (some refer to their borrowers as ‘clients’ or ‘partners’) and typically hold loans to maturity.

“In broadly syndicated loans, it’s just cost of doing business,” said one source. “You assume holes in agreements will get exploited. There is less of a relationship [than direct lending]. You take on a bit more risk, but the greater liquidity means you can get out.”