Mandate letters for fully underwritten deals generally contain a market flex. A market flex sets out the circumstances in which syndicate arrangers are entitled to unilaterally adjust the pricing, structure, terms and possibly the total financing amount to the extent necessary to ensure its successful syndication. Without market flex, arrangers would have to commit to the pricing and covenant package of financings well before the signing, thereby assuming the full risk of changes in market conditions.
Lead arrangers exercise a market flex before finalizing the facility agreement to ensure successful syndication of financings. When “flexed”, the terms in the facility agreement will differ from those specified in the term sheet.
It would be unusual to see market flex and clear market provisions in a [leveraged] Facility Agreement for confidentiality reasons. [Instead, such] provisions and syndication obligations will often appear in a separate syndication side letter.
A margin flex and a structure flex allow for the change in a facility’s pricing or structure, respectively, to facilitate its successful syndication:
- Margin flex – An adjustment to a loan’s interest margin (pricing) during syndication to reflect a change in prevailing market conditions, to facilitate its successful syndication;
- Structure flex – An adjustment in the structure of a financing (reallocation of amounts between tranches of a multi-tranche facility) during syndication to reflect investor interest and to ensure its successful syndication.