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When can interest margin change?

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A margin flex allows bookrunners to unilaterally adjust to a loan’s margin during syndication to reflect a change in prevailing market conditions, to facilitate its successful syndication.  A margin flex typically includes limitations, such as a maximum percentage increase.

Grid-based pricing determines loan pricing based either on the credit rating, the leverage ratio, or any other agreed upon metric of the borrower.  A margin grid is a matrix used to adjust the margin (price) of a term loan or revolving creditfacility and, where applicable, a commitment fee during the life of facilities usually based on a credit rating of the borrower and/or a specific financial ratio, commonly net-debt to EBITDA ratio.

For example, if the issuer’s debt to EBITDA is less than 3x, pricing is Euribor + 275; if such ratio decreases to 2.5x, pricing is Euribor + 250.

– Standard & Poor's, 2013

Leveraged facilities agreements commonly use a margin ratchet linked to one or more of debt, interest and cash flow coverage.  Step-up pricing increases the margin on a loan over time, while reducing interest expense in the early years of the financing, as is common in project finance.

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