reverse flex

USA

The concept of reverse flex applies during the syndication process of a syndicated loan facility. It is the opposite of market flex. If the loan marketing by the arranger is so successful that more lenders are willing to commit larger amounts to the loan facility than the borrower needs, the loan is said to be "oversubscribed." In this case, depending on the relationship between the borrower and the arranger, the arranger can alter the economic terms of the proposed facility to make it more favorable to the borrower and then ask the interested lenders whether they will recommit to the facility with its modified terms.

If enough lenders agree to the modified terms so that the full amount of the facility is still committed, the loan is said to be "reverse flexed" and will proceed to closing on the modified terms.

The economic terms that are commonly modified in reverse flex situations are:

• Interest rate margins. (This can be a straight reduction of the applicable margin or it may involve adding a stepdown to the margin so that the applicable margin decreases if the borrower achieves a specified leverage ratio.)

• LIBOR floors.

• original issue discount (OID).

Based on its discussions with potential lenders during the marketing phase of the loan, an experienced arranger can determine by how much it can change the applicable provisions and still obtain sufficient commitments from lenders to close the loan. Reverse flex is not documented in the loan commitment papers. This means that the arranger is not obliged to seek better terms for the borrower if there is greater interest in the loan than was expected at the time the borrower and the arranger originally negotiated the terms of the loan commitment letter. Whether an arranger will accommodate a borrower's request for reverse flex depends on the commercial relationship between the borrower and the arranger.