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.
During the period from the date of [this letter/the Term Sheet] to the date, following close of primary syndication, [...] any Mandated Lead Arranger or Underwriter shall be entitled [...] to change the pricing, terms and/or structure [(but not the total amount)] of the Facility/ies if that Mandated Lead Arranger or Underwriter determines that such changes are advisable in order to enhance the prospects of a successful syndication of the Facility/ies.– Loan Market Association, 2016e
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.