The underwriting spread is the difference between the underwriting fee received by lead underwriters for the initial underwriting of the total financing amount and the amount of this shared with the sub-underwriters in the form of the sub-underwriting spread or paid directly to participant lenders in the form of closing fees.  The sub-underwriting spread is the difference between the amount of the underwriting fee paid by lead arrangers to sub-underwriters on the basis of the allocated amount of their underwriting and the closing fee paid by the sub-underwriters to participant lenders.

Unlike a margin flex, a spread flex is not a market flex.  A spread flex allows for an adjustment to underwriting spreads, typically accompanied by underpricing.  A downward spread flex increases the cost of the financing to the borrower when it is met with an increase in loan underpricing, while an upward spread flex generally has no effect on underpricing.

When spreads are flexed up, the share retained by the lead arranger is larger.  The point estimates imply that a 100 bps upward flex in spread is associated with an increase in the lead arranger share of around 1.06 to 1.36 percent.  

When interest in underwritten facilities is high, arrangers decrease (downward flex) underwriting spreads and reward participant lenders while increasing the underpricing and final allocations to lenders.  Conversely, when prospective lenders show little interest in the facilities, arrangers limit the underpricing, retain a larger amount of the loan, and increase (upward flex) underwriting spreads.  Facilities are underpriced also to compensate lenders for loan retention costs.

In terms of numbers, we observe a break price for 588 (86%) of the 682 deals with positive spread flex.  This compares to 874 (93%) of the 938 deals with negative spread flex.

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