Term sheet
At the start of the financing transaction, the bank and the borrower (or issuer in the case of the bond issue) will agree a term sheet. This is a statement of the key terms of the transaction (e.g. loan amount, interest rate, fees to be paid, key representations, undertakings and events of default to be included in the loan agreement/bond terms and conditions). The term sheet is equivalent to heads of terms in other transactions. It is not intended to be a legally binding document, rather a statement of the understanding on which the parties agree to enter into the transaction.
Loan agreement
The loan agreement sets out the main commercial terms of the loan such as amount of interest, dates on which interest will be paid, the date(s) on which principal needs to be repaid and any fees due. It will also include most of the other information from the term sheet but in much more detail. The loan agreement is one of the most heavily negotiated documents in a debt finance transaction.
This type of loan agreement tends to be used primarily for committed facilities (i.e. term loans). On-demand facilities on the other hand (i.e. overdrafts) tend to use much more straightforward and informal documentation. They are often signed up on the bank’s standard terms which are rarely negotiated and include minimal information in relation to interest rates (which tend to be high) and other payment obligations.
Debt securities have their own set of documentation which includes extensive information to enable investors to make an informed decision on whether or not to invest.
Security document
If a loan/bond is secured, a separate security document will be negotiated and entered into. This document will set out what assets are being given by way of security and the specific type of security which will be taken over each asset. It will also set out any specific provisions or undertakings relating to the secured assets (for example, an obligation to insure any property and a restriction on the chargor’s ability to sell the assets).