A flex provision is found in loan financing commitments. It allows the financing agents to change various terms of the financing agreement when necessary to successfully syndicate the loans. This flexibility is referred to as the “flex language” or “market flex provision.” These terms which may be altered can include the amount, pricing, structure, yield, tenor, conditions and others. This is an important concept in mergers and acquisitions as the terms of a deal evolve in order for the acquirer and target to consummate the takeover.
Flex language may either be “closed-ended,” in that there is a finite list of terms that can be changed if necessary to successfully syndicate the loans. Alternatively, it can be “open-ended,” meaning that any of the terms of the loan documents may be changed.
Various examples of “flex” topics are
- Pricing flex – increase the interest rate on the loans
- Structure flex – reallocate portions of the loans between loan facilities or other debt securities of the borrower or its parent company
- Call premiums – add or increase prepayment premiums on the term loans or second lien loans
- Covenant flex – amend the negative covenants or the financial covenants
Agent banks often agree to specific limits on changes to certain terms such as a cap on increases in the interest rate. However, occasionally, if a loan is “oversubscribed” because more lenders are willing to commit greater amounts to the loan than the borrower needs, the agent bank may change the terms of the loan to make it more favorable to the borrower. This process is sometimes referred to as reverse flex.
Flex Provision Example
The following text is taken from the Form PREM14A filing made by Forescout Technologies (FSCT) on December 12, 2019 in relation to the proposed all cash deal takeover by Ferrari Group Holdings
Financing
Under the merger agreement, each of Parent and Merger Sub agreed to use and cause their respective officers, employees, advisors and other representatives to use their reasonable best efforts to:
- maintain in effect the debt commitment letters in accordance with the terms (including any “flex” provisions) and subject to the conditions thereof;
- negotiate, execute and deliver definitive agreements with respect to the debt financing contemplated by the debt commitment letters on the terms and conditions (including any “flex” provisions) contemplated by the debt commitment letters or the fee letters;
- accept (and comply with) to the fullest extent all “flex” provisions contemplated by the debt commitment letters or the fee letters and the debt financing to the extent that such “flex” provisions are exercised in accordance with the terms thereof;
In this document, flex provisions are clearly stated and it is shown where they can affect financing arrangement. Although flex provisions are common in all forms of bond financing, it can be important for traders to be aware of any unique elements which may affect the deal closing probability.
