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What is a finance term sheet?

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Term sheets are often used to initiate a financing transaction, whether bilateral or syndicated, for investment grade, acquisition or real estate financing.  They are commonly solicited from potentially interested lenders by prospective borrowers in response to their invitations to bid.

A term sheet is prepared and submitted by interested banks to the borrower (or occasionally by a strong borrower to the banks) summarizing the key commercial terms (amount, term and margin) and conditions of the proposed financing.  After examining the term sheets, the borrower awards the mandate to one or more banks to organize the financing in a mandate letter.

Term sheets serve as “heads of terms” and the basis for the negotiation of the proposed financing.  A full and detailed term sheet that is agreed at the start of a transaction can help to reduce time and costs later when subsequently negotiating the financing's terms and conditions.

A term sheet is not a financing commitment.  To preclude them from being legally binding until forming part of a formal offer, they include a disclaimer to prevent the bidding bank from being legally bound by them.

The terms in the facility agreement commonly differ from those specified in the term sheet.  Depending on market appetite and "price talk", the financing may be flexed before the facility agreement is produced.

Disney wanted to use operating cash flow for expansion purposes and to pay its management fees and royalties ahead of debt service.  Even though these two stipulations might pose credit issues for certain lenders, Disney was adamant that they be included in the term sheet. – Esty, 2001

Template term sheets are published by the Loan Market Association (LMA) and the Asia Pacific Loan Market Association (APLMA) for use with their template investment grade and acquisition finance (leveraged) agreements.  The LMA also publishes template term sheets for real estate financing.

Other than a leveraged credit facilities term sheet, the Loan Syndications & Trading Association (LSTA) does not publish a recommended form of term sheet.  Instead, financing transactions in the Americas are organized and structured on the basis of documentation prepared by legal counsel.

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