Best Practice Guide for Term Sheet Completeness

Loan Market Association  |  European Leveraged Finance Association

Best Practice Guide for

Term Sheet Completeness

December 2021 December

1 2021
Best Practice Guide for Term Sheet Completeness
Loan Market Association  |  European Leveraged Finance Association

1 Introduction
The provision of a term sheet to prospective participants in a syndicated loan transaction is a well-established and
key component of the primary syndication phase of any deal. Together with financial and other due diligence, the
term sheet should assist the analyst in forming a robust view of the investment proposal and should act as a key
enabler in the commitment process. With other factors often dictating swift turnaround times for the agreement of
full documentation, the timely provision of term sheets and sufficiency of their content are obviously of particular
importance.

As part of a co-ordinated outreach exercise on behalf of their members, the LMA and the ELFA have sought to identify
issues faced by the investor community with regard to term sheet sufficiency. The publication of this guidance
paper is a result of that collaborative work, with invaluable input from respective LMA and ELFA working groups and
specialist review providers (Covenant Review, Reorg, Xtract Research and 9fin).

Feedback from working group discussions highlighted the following areas of concern.

y Term sheets vary significantly in content and sufficiency, varying from as few as 15
pages to more than 40 pages in length.

y Crucially, material terms that investors rely on in order to make their investment decision
are often deficient in detail, or omitted completely and subsequently included without
preview at the full documentation stage.

y The general format of term sheets appears to follow individual precedent rather than
any accepted standard or template.1

y The consensus was that, as a whole, current practice negatively impacts the investor’s
ability to appropriately analyse risk at a key stage of the investment decision process.

y ESG is an area of growing importance and ESG terms need to be properly identified and analysed at the term
sheet stage.

Following further investigative work with working groups and specialist review providers, the LMA and ELFA released
an investor survey in Q2 2020 to assist in prioritising term sheet content where more fulsome disclosure is viewed
as a prerequisite to an informed investment decision. A further investor survey took place in Q3 2021 to determine the
material ESG terms to be included at term sheet stage, and this document has been updated to reflect that input and
to encourage more information flow on ESG provisions.

The checklist below is the result of these efforts, and sets out terms in groupings that reflect the results of the investor
survey and subsequent additional consultation with the working groups.

Improvements in this area are crucial to the proper functioning of the syndication process and loan market as a whole.

1 Given this, it was agreed across working groups that the results of the survey should be used to form the basis of this best practice document,
rather than to attempt to translate these into a form of term sheet template at this stage.

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Best Practice Guide for Term Sheet Completeness
Loan Market Association  |  European Leveraged Finance Association

2 Drafting for completeness – provisions

Set out below are a list of those provisions identified by investors as being of material importance to their
investment decision. These reflect the determinations of the working groups, a wider group of investors
consulted during the process, and the investor survey on term sheet completeness referenced in the
introduction. It is important to note that this is not intended to be an exhaustive list of all terms that should be
presented in the term sheet, but rather the most material terms that investors require fulsome disclosure on at
the term sheet stage of a deal. Term sheets should contain, at a minimum, a fulsome description of all of the
terms set out below.

2.1. E
 BITDA

y Fully drafted definitions of all iterations of Consolidation EBITDA and Consolidated Net Income
y Detail of any add-backs, run-rate adjustments, or similar, in full, with cap levels (and whether the adjustments
presented in syndication are part of this cap) and levels requiring diligence
y Presentation of pro forma opening level of “covenant” EBITDA, including the full calculation
y Presentation of add-backs/run-rate adjustments included in the Base Case Model and/or the quality of
earnings run-rate Consolidated EBITDA analysis in the buy-side financial due diligence report
y Whether EBITDA can be adjusted for IFRS 16, and whether this is consistent with treatment of consolidated
indebtedness

2.2. R
 estricted Payments

y Definition of “retained cash”

y Amount of annual sponsor fee
y Specify whether debt capacity can be used for Restricted Payments, or vice versa
y Specify which baskets are blocked by events of default

2.2.1. Permitted Payments

y Definition of “Restricted Payment” plus material exclusions, including if restricts second lien prepayments

2.2.2. R
 estricted Payments “builder basket”, “Available Amount”
or “Acceptable Funding Sources”
y The component elements from which it is “built”
y Conditions for use; any relevant “start date” from which it begins to build
y 100% reduction or floor components
y Present calculation of any accumulated existing capacity (if back-dated)
y Specify baskets that reduce availability under the builder basket

2.2.3. Permitted Investments

y Full capacity and explicit clarification of presence of J Crew loophole

2.3. I ncremental Facility

y Specify cap amount and all components; dry powder additions
y Purpose
y Bullet / amortisation conditions
y Intercreditor accession obligations
y Specify covenant condition (no more onerous terms)

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Best Practice Guide for Term Sheet Completeness
Loan Market Association  |  European Leveraged Finance Association

2.4. F
 ees

y Margin (matrix likely to be blank); margin holiday period length; margin ratchet – number of steps down that
apply under the margin ratchet to Facility B
y Ticking fee and whether it crystallises if debt is not drawn
y Terms of any junior debt (e.g. pre-placed second lien or PIKs)

2.5. P
 ermitted Disposals/ Asset Sales

y Definition of “Asset Sale” and any non-standard exceptions; payment waterfall

y Details on de-minimis and other material carve-outs
y Step-down ratios applicable to use of asset sale proceeds

2.6. T
 ransaction Security

y Whether the Agreed Security Principles exclude material subsidiaries

y Where transaction security excludes material subsidiaries or certain jurisdictions, specify the % of EBITDA /
Total Assets of the Group and which specific entities are not included
y Guarantor Cover Test: level, % of what (EBITDA/Total Assets, etc) and calculation to show expected closing level
y “Excluded Jurisdictions”
y Specific effective guarantor coverage in light of the Agreed Security Principles
y Precise details of entities providing post-closing security

2.7. P
 ermitted Company Debt

y Specify whether or not (and if there is, the amount) of any sub-limit on the amount of debt that may be incurred
by companies in the credit group that are not themselves borrowers/guarantors
y Specify obligor to non-obligor transfers sub-limit

2.8. R
 atios

y Specify definitions of each

y Define all ratio components, e.g. does the numerator of “Senior Secured Net Leverage Ratio” include only
debt secured equally on the credit agreement transaction security or does it also capture effective senior/
structurally senior debt
y Specify pro forma exclusions under Ratio definitions
y Specify pro forma opening levels of all ratios to be used in the credit agreement, calculated as per SFA
definitions; set out what headroom to base case EBITDA was/will be used for the determination of the
financial covenant level
y Provide calculation of all opening ratios so investors can see how they were arrived at

2.9. E
 vents of Default

y Specify cross default / acceleration thresholds

2.10. D
 ebt Incurrence

y Specify ranking of second lien debt – e.g., is it pari passu in right of payment and subordinated in right of
security or subordinated in right of payment and security?
y Indicate presence of inside maturity basket, no worse test
y Specify conditions of permitted refinancing indebtedness

2.11. D
 etails on Baskets:

y Should include de minimus thresholds, caps, conditions to use

December 2021 4
Best Practice Guide for Term Sheet Completeness
Loan Market Association  |  European Leveraged Finance Association

2.12. A
 mendments and Waivers

y Unanimous consent matters

y Structural adjustment matters and required consents
y Super majority lender threshold and matters

y Treatment of non-consenting lenders

2.13. C
 hange of Control

y Fully drafted definition and whether the deal is portable

2.14. T
 ransfers

y Presence of any deemed consent period

y Details and definition of distress debt fund/loan to own restrictions
y Conditions relating to permitted sub-participations
y Requirement to notify to sponsor
y Any caps on white lists, on a per annum basis and over the life of the facilities
y Information on agent and transfer fees
y Minimum transfers
y Minimum holds

2.15. M
 FN rate, length, calculation, and exclusions/carveouts

2.16. M
 aturity condition and all exclusions/carveouts

2.17. R
 ing-fencing

y Presence of any Unrestricted Subsidiaries / other excluded subsidiaries on closing

y Permitted Investments capacity that can be used for designating Unrestricted Subsidiaries or transferring
assets / property to Unrestricted Subsidiaries
y Conditions for future Unrestricted Subsidiary / excluded subsidiary designation

2.18. F
 ully drafted definition of Indebtedness

2.19. D
 ebt purchase

y Specify conditions related to permitted debt purchase transactions

2.20. T
 reatment of IFRS 16/Operating Leases

y Treatment for covenant calculations under EBITDA and with respect to the balance sheet
y Whether the calculation mechanics can be changed, and under what circumstances

2.21. R
 eports

y Date when the first reports are due and when first compliance certificate is due
y Timing of monthly / quarterly / annual accounts, management presentation, budget

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Best Practice Guide for Term Sheet Completeness
Loan Market Association  |  European Leveraged Finance Association

2.22. E
 SG

y Where the margin is to be linked to the borrower’s sustainability/ESG performance, details of:
y which facility/ies the margin ratchet will apply to;
y which key performance indicators (KPIs)/sustainability performance targets (SPTs) the margin ratchet
will be linked to;
y the KPIs selected by the borrower, including:
y the type and details of the relevant KPIs;
y details of whether KPIs are external or internal;
y details on how KPIs were selected and any applicable benchmarks and baselines;
y details of whether KPIs have been or will be required to be externally reviewed pre-origination;
y details of any underlying definitions, methodologies and/or assumptions; and
y details of any lender consent requirements for the amendment of KPIs.
y the SPTs that have been set for each KPI, including details of:
y how the SPTs have been calibrated and any applicable benchmarks and baselines;
y whether the SPTs, benchmarks and baselines will be required to be externally reviewed pre-
origination;
y how and when external verification of the borrower’s performance against each SPT for each
KPI will take place post-origination, including whether these differ across KPIs; and
y the calculation methodology to be used for determining whether the borrower has met each
SPT for each KPI.
y the trigger for the pricing discount/increase (including the number of SPTs that must be satisfied to
trigger the margin ratchet);
y the level of the margin discount/increase to be applied, and when this will apply from;
y consent requirements for amending KPIs/SPTs post-origination; and
y to the extent applicable, any requirements around re-investing the amount of any margin discounts.
y Where KPIs/SPTs are to be determined after origination of the loan, details of:
y when and how the KPIs/SPTs are to be determined, including any requirements for external review;
y any restrictions on marketing the deal until such time as KPIs/SPTs have been set; and
y the consent requirements to approve the KPIs/SPTs.
y Details of ESG information reporting requirements, including:
y timing for initial and ongoing ESG information reporting;
y scope and content of initial and ongoing ESG information reporting;
y details of how ESG information is to be provided (for example, in annual reporting);
y any requirements in relation to audit/external review of ESG information (pre- or post-origination);
and
y details of the consequences of (i) not delivering ESG information and/or (ii) providing inaccurate/
incomplete ESG information.
y Details of any ESG information to be provided as a condition precedent.
y Where relevant, details of the use of proceeds, including any green and/or social projects towards which
proceeds are to be applied.

3 Conclusion
It is hoped that more a fulsome disclosure of key provisions in the initial term sheet will aid investor’s ability
to analyse key risks, and commit to new deals in the market, aiding liquidity generally.

December 2021 6