2. What Lenders should Know about Commitment Letters
The three methods of starting negotiations with a potential
borrower for a loan:
(i) With the term sheet;
(ii) with the Commitment Letter, without negotiating a term sheet
first;
(iii) by going directly into creating loan documents.
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3. What Lenders should Know about Commitment Letters
Where to Start? The term sheet
The term sheet is a document that outlines the basic business terms
that the Bank wants to propose
Typically it includes a paragraph or section that specifically states
that this document is not an offer and its acceptance by the prospect
does not create a commitment by the Bank to make the loan
It may also state that the term sheet is subject of modification by the
Bank at its sole discretion prior to the execution of a commitment
letter
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4. COMMITMENT LETTERS
The next step
The commitment letter is an agreement to provide
financing upon satisfaction of certain conditions
outlined in the document. A lot of those conditions
deal with the due diligence investigation by the
bank of the borrower, the project to be financed
and the proposed loan terms. Some of the key
terms to be included in the commitment letter are
set forth in the next slide.
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5. COMMITMENT LETTERS
Basic Provisions
Amount of Credit Facility, type of facility (term loan, line of credit
etc.), interest rate provisions and term of the loan.
Default rate and late charges
Method of disbursement of loan proceeds
Conditions to closing or initial funding
Commitment Fee and other Bank fees
Collateral
Insurance Requirements
Default Provisions and Grace Periods
A reference that customary representations, warranties and
covenants will be included in the Loan Documents, and all
other provisions that Bank’s counsel may require.
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6. COMMITMENT LETTERS
Some Special Issues
1. Secured v. Unsecured Loan: The commitment letter must make it
clear that the loan is either unsecured or secured. If the bank
intends to retain a security interest in the deposit accounts of
borrower, the loan is not unsecured, even if there is no other
collateral involved.
2. Understanding the Collateral
a. Real Estate Security
b. Asset based collateral
c. Pledge of accounts, stock etc.
d. Assignments
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7. COMMITMENT LETTERS
Covenants
a. List of Reporting Covenants
(i) annual financial statement and interim statements
(ii) reporting method (GAAP);
(iiii) tax returns required and when;
(v) certification of no default and covenant compliance
(vi) other information pertinent to the particular borrower or loan
(vii) any other information that the bank may reasonably require.
b. Financial Covenants (bank specific definitions and covenants)
c. Reference to customary affirmative covenants
d. Reference to customary negative covenants (some may be better to
spell out in the commitment letter, such as change in control)
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8. COMMITMENT LETTERS
What else?
4. Some other provisions to Include In the Commitment
Due diligence items to be completed prior to closing to the satisfaction of the
bank (appraisal, review of financials, review of construction plans etc.)
Term of commitment letter (date of expiration)
Date by which the commitment letter has to be accepted (the proposed terms
can stay open only for so long before the borrower accepts them)
Obligation of borrower to pay legal and consulting fees of the bank
This presentation only includes some thoughts about how to structure a
commitment letter. The list of topics discussed is limited and there are
other provisions that should also be included in a commitment letter or
term sheet. This presentation does not constitute legal advice with
regard to the subject matter presented.
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