Term Sheets in Loan Transactions

Term sheets are an important part of the loan transaction process. The initial draft of the term sheet is usually drawn up by the lender and outlines the terms of the proposed loan to the borrower. The term sheet is usually then negotiated between the lender and the borrower.

It is generally in the lender’s interests to keep the term sheet as broad and vague as possible. For example, it may set out details of a number of events of default but also state that the list is not exhaustive. This will give the lender maximum flexibility when it comes time to finalise the definitive loan agreement. The longer and more detailed a term sheet, the harder it is in practice for the lender to deviate from or add to its terms. The detailed terms will have been negotiated between the parties and the borrower will resist any further changes.

Typically, term sheets are not legally binding and simply set out the intentions of the parties. However, in some cases, certain clauses are deliberately made legally binding, such as the confidentiality clause where a customer is concerned that it has provided confidential information to a lender with which it does not have a current relationship or where the lender does not want its terms shopped to other lenders. To ensure there is no confusion over whether the term sheet is legally binding, it is always recommended that the term sheet contain a clear statement on this point.

Terms sheets generally expire by a specified date. The term sheet also usually states that provision of the loan facility is subject to (i) the lender’s satisfactory completion of due diligence on the borrower, (ii) approval by the lender’s credit committee (if this has not yet been obtained), and (iii) completion of a loan agreement and related documents satisfactory to the lender. The requirement that documents are satisfactory to the lender also gives the lender scope to depart from the term sheet during negotiations of the loan agreement.

Next month we will look briefly at the structure of a typical loan agreement.