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.
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.
The market flex is typically exercisable from the date of the signing of the mandate letter to the facility signing and syndication closing, on which date all the lenders subject to primary syndication become party to the facility documents. It is not an “out”, unlike the material adverse effect (MAE) or the material adverse change (MAC) clauses since it does not allow the MLA to pull a commitment.
Before the advent of the market flex clause, banks would commit to the pricing and covenant package of financing well before the signing, which exposed them to all the risk of changes in market conditions. Introduction of the clause shifted the market risk from the banks to the borrower. Where a flex is triggered and the borrower refuses to comply, the mandate is breached, which allows the arrangers and underwriters to terminate the mandate and underwriting.
In negotiating market flex clauses, borrowers will want to preserve the optimal structure for its loan and minimize the risk of an increase in pricing. They will also request the right to terminate the mandate if the flex is invoked, since offers from previously competing lenders may then look more attractive.