A Rs 2,000 crore term loan B for Pravinta Cables launches at benchmark plus 400 at 99.5. Commitments reach Rs 1,700 crore, and another Rs 900 crore appears at plus 425 at 99.0. The flex allows 50 basis points. Do you flex, and what is left on the bank's books either way?

Flex to 425 at 99.0: the book grows to Rs 2,600 crore, the bank holds nothing, and the cost is a certain Rs 10 crore of fee. Not flexing leaves Rs 300 crore on the books, with an expected sale loss of about Rs 10.2 crore and a range up to Rs 16.5 crore. On average the two are close, so the tail and the capital tied up decide it. Pravinta pays about Rs 5 crore a year more in margin.

A wholesaler who promises a shop a fixed price for goods he has not yet bought is exposed if his own supplier raises prices. He protects himself by writing in a clause that lets him pass part of the rise on. Market flexA clause in the commitment letter that lets the arranging banks change pricing or terms, within set limits, so the loan can be sold to investors. is that clause: it lets the arrangers move the pricing so the loan clears, with the margin change paid by the borrower and, here, any extra discount paid out of the banks' fee. The margin can move up to 50 basis points; this case needs only 25.

Put them on one yearly number. A price of 99.5 means investors pay 99.5 and get back 100, so the half point is spread over a three-year expected life, about 17 basis points a year. Launch terms are worth about 417 basis points a year to an investor and flexed terms about 458, a 42 basis point improvement that brings Rs 900 crore more demand.

Flexing moves the price from 99.5 to 99.0. Half a point on Rs 2,000 crore is Rs 10 crore, a quarter of the Rs 40 crore fee, paid with certainty. Not flexing leaves Rs 300 crore to sell later. At 97 the loss is 2.5 points, Rs 7.5 crore; at 94 it is 5.5 points, Rs 16.5 crore. Weighted seven to three, the expected loss is Rs 10.2 crore, almost exactly the fee given up.

Three things the averages leave out. A held loan uses the bank's capital and its limit for this borrower, the losses on holding are skewed to the bad side, and a hung dealA loan or bond the underwriting banks could not sell at the agreed terms and must keep on their books. in a weakening market often gets worse, not better. Flexing also buys a 1.3x covered book, which lets you allocate to steady loan funds and shade the flex if orders hold. Against that, Pravinta pays about Rs 5 crore a year more in margin, a cost worth naming to the sponsor. The view: flex to 425 at 99.0, scale allocations to about 77%, and hold nothing.