Simply Finance is a series of newsletters that we hope can contribute to increased understanding of financing law and to demystify financing documents. Our aim is to explain concepts, terms and expressions in a simple way so that anyone can understand them.
Term Sheets in Finance Agreements
What is it?
A term sheet is often prepared as the basis for a financing arrangement and outlines the main terms and conditions for a financing agreement between a borrower and a lender(s). Typically, this includes the type of financing or facility (term loan, revolving credit facility, debt instruments etc.), the loan amount, tenor, interest, security, repayment and prepayment, covenants, conditions precedent, and events of default.
Why is it used?
Finance agreements can be extensive. As an example, templates from the Loan Market Association (regularly used in the Norwegian financing market) are over 200 pages. Nordic Trustee’s template bond terms is only app. 50 pages in comparison, but term sheets are still used in debt capital markets transactions to provide an overview of the key terms to potential investors.
For facilities agreements, an agreement on the main terms in a term sheet will typically allow a lender to seek (conditional) credit approval from its credit committee. The borrower, and, in multi-party transactions, the agent or lead arranger, may then in parallel move forward with presentations of the intended transaction to other lenders, investors and stakeholders. For Norwegian high yield bonds, term sheets are prepared to make it easier for investors to identify the key terms of the deal and is part of the subscription documentation.
How is it used?
A term sheet is used as basis for drafting and negotiating final finance documents. The final wording of the finance agreement should be consistent with, and regulate in more detail, the provisions of the term sheet. Deviations from the term sheet would have to be agreed between the parties.
For loan facilities agreements, final documentation will typically also contain supplementary and mechanical provisions, often reflecting what is generally considered market practice for such type of financing (“boilerplate terms”). For high yield bond issues, Nordic Trustee’s template will form the basis for the final financing agreement and amendments are only made based on the terms of the term sheet.
In less complex bank financings, Norwegian banks regularly document the agreed main terms in an offer letter (Nw. tilsagnsbrev), which are to apply in addition to (and in case of conflict, prevail over) the bank’s general terms and conditions. The borrower would typically be requested to sign the offer letter and return it to the bank.
Why should a lender pay attention?
Based on Norwegian contract law principles regarding formation of contract, a term sheet could be held to be a legally binding (final) agreement by a Norwegian court if the financing arrangement is, for all intents and purposes, sufficiently regulated in the term sheet. Any reservations should therefore be specific (e.g. approval from credit committee or board). Under Norwegian law, generic reservations (“non-binding”, “indicative”, etc.) will not necessarily be adequate.
As the final agreements will be based on the term sheet, a lender should ensure that the content of the term sheet properly regulates risks specific to the borrower in question. Norwegian law is based on civil law traditions, with principles for contractual interpretation that differ from common law systems like English law. A Norwegian law financing agreement will be interpreted and, where silent, be supplemented by applicable background law.
When interpreting a contract, a Norwegian court will take several factors into consideration, including pre-contractual elements. Although a term sheet is normally intended by the parties to have no separate function following execution of the final agreements, it may in the event of a dispute be used as evidence and relied on to clarify the intended meaning of the final agreements. In the event of a direct conflict between provisions of the term sheet and the final agreement, the latter will normally prevail.
For investors investing in bonds, the term sheet is the key investment document as it sets out the main terms of the bonds. Investors will need to carefully review the specific terms of the bonds before investing. After the term sheet is final and the bonds have been subscribed, final financing agreements are generally a formality.
What does it mean for the borrower?
First, the proposed loan amount and amortisation profile need to cover the borrower’s financing need. Second, the borrower needs to carefully assess financial and operational restrictions imposed on its business and consider whether the terms allow for sufficient flexibility for the borrower to pursue its business plan. In high yield bond transactions, it can be cumbersome to amend the terms of the bonds after the final term sheet has been prepared and the bonds have been subscribed. Thus, it is especially important that potential issuers carefully review the term sheet before investors subscribe for bonds.
Important to note
Norwegian background law should also be kept in mind during the term sheet negotiations. For loan facilities agreements, the Norwegian Financial Agreements Act will apply unless anything to the contrary is agreed upon. Purported security rights must also as a main rule be established and perfected pursuant to Norwegian law. Lenders should note that there are restrictions in terms of assets which can be pledged as security and the extent to which other group companies are free to provide security for the borrower’s debt. Any particularly onerous provisions/unfair contract terms could also be set aside by a Norwegian court, although the threshold for such revision is high between professional parties.