Corporate Borrowers Fight Price Terms That Volatile Market Made

Less than a month ago, bankers were talking about how so-called market- flex pricing had forever changed the syndicated loan market.

But market flex-in which syndicated loans are priced according to market conditions rather than on preset agreements with borrowers-has become a serious point of contention between borrowers and lenders at the negotiating table.

"Everyone would like to believe it's here to stay, but I'm not sure it is," said a banker at a top-10 syndicated lender. "No one is going to say they're not using it, but it's not as prevalent as lenders would have you believe."

In its purest form, market flex gives loan arrangers the power to restructure and price deals without renegotiating terms with the borrower. The technique first appeared in 1997; it became a standard part of loan agreements last fall, when the stock and bond markets took a dive.

Though market flex is still used, its popularity waned as the markets recovered, bankers and borrowers said. In many of today's loans, bankers report, pure market-flex language has been replaced by watered-down versions that give borrowers more control against price increases-or prices simply are capped.

Lenders also say many investment-grade borrowers are demanding and receiving a concession that market-flex language be eliminated from new loan contracts altogether.

Even borrowers such as Southland, Mich.-based Federal Mogul Corp., which agreed to market flex and praised the technique, will not just hand loan managers the power to raise prices.

David Bozenski, vice president and treasurer at Federal Mogul, said agreeing to market flex is "a decision that needs to be made each time you go out" to the loan market.

"Clearly you'd prefer not to pay a higher spread, if you don't have to."

In September 1998, Mr. Bozenski agreed to market flex language on a $1.95 billion syndicated loan after a pitch by James B. Lee, vice chairman and head of global investment banking at Chase Manhattan Corp. Chase bankers initially brought the 18-month term loan to market with a price of the London interbank offered rate plus 200 basis points.

A week later, the loan had been restructured into a $1.45 billion 18- month term loan at Libor plus 225 basis points and a $500 million 8-year term loan priced a Libor plus 275 basis points-an increase that would cost Federal Mogul more than $7 million the first year of the loan.

Mr. Bozenski said Federal Mogul made the right choice in agreeing to market flex. When the company's loan was structured, the high-yield bond markets were closed to new issuers; the stock market had been devalued 15%; and many loan deals had been scrapped. Federal Mogul needed the cash to finance its planned buyout of Cooper Automotive.

"We saw the market was in turmoil, and we wanted it to go through," Mr. Bozenski said. "We fully expected to be back out there again. So we needed to pay the market rate and keep good relations with investors."

Other borrowers say they are agreeing to market flex on the advice of loan arrangers. Kurt D. Blumenthal, a vice president of finance at Express Scripts Inc., a St. Louis managed-care company, said he agreed to market flex for a $1.1 billion loan to be led by Credit Suisse First Boston.

"Our understanding is that it is what the market requires these days," he said.

Still, Mr. Blumenthal said the market-flex concept did come as a surprise. Express Scripts last tapped the loan market in April 1998. "We didn't have market flex in that agreement," he said.

Asked if he was worried that pricing might increase by the time the loan is expected to close on April 1, Mr. Bluenthal said, "It's too early to tell. I guess it depends on how receptive the market is."

Other bankers are running into stronger skepticism.

Bob Patterson, the head of syndicated lending at Bank One Corp., Chicago, said he continues to push for market-flex language in all of its transactions-and almost always gets it-but not without a fight from chief financial officers.

"I haven't met a CFO who hasn't complained about market flex," Mr. Patterson said. "Every CFO wants the best possible financing for his company. Life is a negotiation."

And bankers continue to push for market flex in those negotiations. Richard B. Carey, a director of syndicated finance at Credit Suisse First Boston, argues that as the market tumult in September 1998 showed, market flex gives borrowers a better chance of getting their loans syndicated.

Mr. Carey said Credit Suisse First Boston has at least some form of market flex in the $2.5 billion in loans the firm is arranging, including the Express Scripts loan. Still, he concedes that the market-flex agreements made these days are not of the blank-check variety popularized last fall.

"The child has been born, but there will be growing pains along the way," Mr. Carey said. "Five years from now, loan pricing will be unlike what we do today, and we'll wonder how it could have ever been done differently."

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