Prospective borrowers receive a term sheet in response to their invitations to bid.  A term sheet is prepared and submitted by interested banks to the prospective borrower (or occasionally by strong borrowers to the banks) summarizing the key commercial terms (amount, term and margin) and conditions of the proposed financing, as agreed in principle.  It also names the parties that will be involved in the financing and their expected roles and the fees.  It is the key document upon which borrowers base their decision on awarding the mandate.

Term sheets are used to initiate a financing transaction, whether bilateral or syndicated.  Their main purpose is to set out the basic loan terms and conditions for the transaction that were agree in principle between the borrower and mandated lead arrangers (MLAs) bank (“heads of terms”).  They are used by lenders to obtain credit approval and borrowers for obtaining corporate authorizations (e.g., board or shareholder approval).

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.

In preparing the offer, a bidding bank must decide whether to underwrite the full commitment, commit to an arrangement fee and the margin (interest spread), and develop a preliminary syndication strategy.  After examining the term sheets, the borrower will award the mandate to one or more banks to organize the financing.  To preclude them from being legally binding until it forms part of a formal offer, it is essential that they include a disclaimer to exclude the bidding bank from being legally bound by the term sheet.

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