Pricing flex is a relatively recent phenomenon in the history of leveraged loans.

Prior to 1998 lead arrangers would price loans weeks, sometimes months, before launching transactions into the market. Because many lenders in the syndicate traditionally ended up being relationship banks, underwriters had relatively little risk those banks would flake on a deal if market conditions changed one way or the other.

As time passed, however, buyers became more institutional. The loan market grew to rival the high-yield bond market in size and liquidity. But bonds are typically “best-efforts” (vs. “bought-deal”) executions; underwriters won’t hold the bonds. If markets move, the leads simply adjust the bond price to the market. Loan arrangers, in contrast, truly underwrite deals. Once pricing is set, that’s it. If it’s off-market, agent banks are stuck selling whatever paper they can at that price, or it comes out of their pocket.

The Russian debt crisis changed all that. With credit markets shut for months, some banks were hung with underwritten paper and few buyers at any price. Underwriting risk had become asymmetric with banks on the short end. One solution soon appeared: Why not adapt the bond price adjustment feature for loans?

One market leader rolled out a deal which allowed it to adjust the all-in spread without the borrower’s permission. It was the first instance of flex in the loan market. But would there be a second?