Term sheet

A term sheet is a short document that summarises the main terms of an agreement. It serves as the first basis for negotiation, before the facilities agreement is drafted. In a syndicated financing, it brings together the terms negotiated between the arranger and the company, then serves as the basis for inviting the other lenders. For private debt, it takes the form of an offer from the fund: amount and tranches, maturity, amortisation profile, margin and reference rate, fees and original issue discount, financial covenants with their levels, security and guarantees, restrictions on dividends and additional debt, conditions precedent. A term sheet rarely commits the lender to fund: it remains subject to due diligence and to investment committee approval. Some clauses, such as exclusivity, non-disclosure and the allocation of costs, are however drafted to bind the parties from signature. For you as borrower, the term sheet sets most of the economics of the financing. Once exclusivity has been granted, a point left vague at this stage is renegotiated from a weaker bargaining position.

A company receives three term sheets for a €60m financing over seven years. The first offers EURIBOR plus 5.25% with a 2 point discount, the second EURIBOR plus 5.75% with no discount, the third EURIBOR plus 5.50% with a leverage covenant set at 5.5x instead of 4.75x. The finance director compares the three on total cost and on the headroom the covenants leave.

• Covenant levels and their gap with your business plan.
• Total cost: margin, discount, fees, commitment fee.
• The length and terms of the exclusivity granted to the lender.
• Conditions precedent and the timetable to closing.
• Who bears the professional fees if the transaction does not complete.