In the financing of overseas transactions, the lender expresses its willingness to participate after initial contact with the borrower, and will send a term sheet to the borrower, including the basic information of the loan, as well as the security measures and financial commitment arrangements established based on the judgment of the borrower and the project's risk points. The lender and borrower will further discuss the term sheet, clarify more information, and negotiate a mutually acceptable version. The determined term sheet becomes an important document for the internal resolution of the lender's credit committee, and becomes the basis for both parties to negotiate and determine the loan agreement after being approved by the credit committee. It can be seen that the term sheet is an important document connecting the preceding and the following in financing transactions. During the working phase of the term sheet, both parties communicated on risk points and corresponding risk pricing, reached an agreement, and laid the cornerstone of the entire transaction.

We have noted that the Loan Market Association (LMA) and the European Leveraged Finance Association (ELFA) have recently released the latest term sheet for syndicated loans. They believe that in addition to financial due diligence and legal due diligence, the timely provision of the term sheet is of great significance for the smooth progress of the transaction and for entering the next stage of the transaction. For this reason, LMA and ELFA issued complete terms and conditions for the term sheet in early 2022. Of course, these terms and conditions are not exhaustive, but they reflect the concerns of creditors in the European market and include all relevant risk points during the term sheet work phase. Therefore, this comprehensive term sheet ****** practice guide has important reference significance for creditors in Asia, especially in the application of cross-border transactions. We have translated the complete terms of this term sheet as follows for the benefit of our readers.

Founded in 1996, LMA is an important multinational industry self-regulatory organization in the credit asset circulation market in Europe, the Middle East, and Africa. In recent years, the Association has developed standard text of loan transfer agreements, transaction guidelines for the European loan secondary market, and other documents to improve the efficiency and transparency of the loan primary and secondary markets, and enhance market liquidity and standardization. The contract template developed by the European Loan Market Association has become the basic model for the European loan market, and LMA has also become an important driving force for the standardization of debt transfer markets in Europe, Africa, and the Middle East.

In order to prepare this term sheet, LMA and ELFA conducted a detailed survey with their respective members, including working group review and expert review. The feedback obtained is as follows:
Term sheets vary greatly in content and level of detail, ranging from 15 to 40 pages;

The important terms that investors rely on are often insufficient in detail, or are completely ignored, or are not fully considered when making trading agreements;

The format of the term sheet is diverse and there is no widely accepted format;

Participants agreed that current practices have harmed investors' ability to fully analyze risks at the critical stage of making investment decisions;

ESG is increasingly developing and important, and ESG terms should be analyzed and identified during the term sheet stage.

1、 Complete terms

1.EBITDA

(1) Detailed definition of consolidated EBITDA and net income.

(2) Details of any add back, run rate, or similar adjustments at the capital level, and what level of adjustment requires due diligence.

(3) The complete process of calculating EBITD for reference under merger and acquisition terms.

(4) The calculation of additions and adjustments under the Base Case Model (as agreed by both parties after the transaction is completed) and/or the quality of consolidated EBITDA revenue adjustments in the buyer's financial due diligence.

(5) Whether EBITDA can be adjusted in accordance with Chapter 16 of International Accounting Standards (Operating Leases) and whether it is consistent with the treatment of consolidated liabilities.

2. Restricted Payments

(1) The definition of retained cash.

(2) The amount of the annual sponsorship fee.

(3) Determine whether debt capacity can be used to pay restricted payments or vice versa.

(4) Identify which types of payments are blocked in the event of default.

① Permitted Payments: The exclusion of significant matters from the definition of restricted payments, including restrictions on the repayment of second level liens

② "Constructor Classification", "Available Amount", or "Acceptable Source of Financing" in Restricted Payments.

③ Permitted Investments: Complete investment scope determination and clarification caused by the J Crew vulnerability.

Note: Before bankruptcy, J. Crew transferred his most valuable intellectual property rights through loopholes in the loan agreement. Through a $150 million investment permit clause, he transferred $250 million worth of IP assets to his unsecured subsidiary, and then mortgaged the transferred IP assets again to repay the parent company's structured subprime loan with the funds obtained.

3. Incremental loans

(1) Specify the upper limit amount and all components, as well as the provisions of the petty cash.

(2) Purpose.

(3) Amortization conditions.

(4) Obligations of the Syndicated Lender to Join.

(5) Clarify the terms of the agreement (no additional obligation conditions).

4. Expenses

(1) Security deposit; The length of the holiday period of the deposit, and the ratchet clause of the deposit.

(2) Delay compensation and whether to start calculating if the loan is not drawn down.

(3) The terms of any subordinated debt.

5. Permitted asset sales/disposals

(1) The definition of asset sales and any non standard text exceptions, revenue waterfall clauses.

(2) Regardless of rules (de minimis) and other significant exclusions.

(3) The step-down ratio method applicable to income from asset sales.

6. Security for transactions

(1) Determine whether the agreed guarantee principles exclude major subsidiaries.

(2) Determine whether the guarantee for the transaction excludes major subsidiaries or jurisdictions, and clarify that a certain proportion of the Group's EBITDA/total assets and specific entities are not included in the guarantee scope.

(3) Guarantor coverage test: the proportion that should be covered by benchmark EBITDA/total assets and other indicators, as well as the expected proportion at the time of delivery.

(4) Excluded Jurisdiction.

(5) Define the coverage ratio of a specific guarantor based on the guarantee principles determined by both parties.

(6) Details of the subject matter of the guarantee obligation undertaken after the Closing.

7. Permitted Corporate Lending

(1) Specify whether companies within the borrower group that are not borrowers/guarantors can borrow and the scale of the borrowing.

(2) Specify the limit of transfer from debtors to non debtors.

8. Proportion

(1) Define the various proportions clearly.

(2) Define the components of various ratios, for example, does Senior Secured Net Leverage Ratio refer to secured debt as defined in the contract, or does it include debt that is actually leveraged?
(3) Clarify whether there is any exclusion from the proportion definition.

(4) Clarify the initial pro forma ratios for various ratios used in the debt agreement, the calculations made according to the definition of the debt agreement, and the calculation method of EBITDA to determine the level of financial restrictions.

(5) Provide various calculation methods for initial ratios so that investors can see the entire process of drawing conclusions.

9. Breach of contract

Clarify the circumstances of joint and several defaults and the acceleration threshold.

10. Debt incurrence

(1) Clarify the registration of the debt corresponding to the second lien, such as whether its right to compensation should be distributed proportionally or in a later order.

(2) Determine if the "creditor won't get worse" test occurs when an internal maturity loan basket appears.

(3) Specify the conditions for allowing debt swaps.

11. Loan basket details

The threshold, maximum, and application scenarios should be increased regardless of rules.

12. Supplementary Agreement and Waiver

(1) Matters agreed upon.

(2) Structural adjustment matters and required consent.

(3) The super majority threshold for borrowers and corresponding matters.

(4) Handling of dissenting borrowers.

13. Change of Control

Complete definition and whether the transaction is subsequently transferred.

14. Transfer

(1) Whether there is a stage of deemed consent.

(2) Definition and details of impaired debt funds/loans, and whether there are restrictions on control.

(3) The conditions for allowing secondary participation

(4) Inform underwriters of the requirements.

(5) Any restrictions on the whitelist on an annual basis and for the duration of the debt.

(6) Agency information and transfer fees.

(7) Minimum Transfer Threshold.

(8) Minimum holding threshold.

15. Proportion, length of time, calculation, and exclusion/splitting of the most favored nation clause

16. Debt maturity conditions and exclusions/spinoffs

17. Fence Restrictions

(1) Any unrestricted subsidiaries/other excluded subsidiaries at the time of closing.

(2) An investment that a designated unrestricted subsidiary can make or transfer assets to an unrestricted subsidiary.

(3) Conditions for future unrestricted subsidiaries/designation of excluded subsidiaries.

18. Complete Definition of Debt

19. Debt Acquisition

Specify the allowable debt acquisition conditions.

20. IAS 16/Treatment of Operating Leases

(1) The treatment of EBITDA and the treatment of the balance sheet.

(2) Whether the calculation method can be changed, or in what scenarios.

21. Statement

(1) The date on which the first report should be issued and the date on which the first compliance report should be issued.

(2) Monthly/quarterly/annual reports, management presentations, and budgets.

22.ESG

（1） Whether the margin is linked to the borrower's sustainability/ESG performance, including:

(1) The specific loan is subject to a margin ratchet clause.

(2) What kind of KPI/Sustainability Performance Target (SPT) is linked to the margin ratchet clause.

(3) The KPIs selected by the borrower can include:

Types and details of KPIs;

KPIs are internal or external;

Reasons for selecting specific KPIs and applicable benchmarks and baselines;

Whether specific KPIs need to be evaluated externally during the review stage;

Any specific definitions, methodologies, or assumptions;

Whether the lender's consent is required for any KPI modifications.

(4) The specific SPT corresponding to each KPI includes the following:

How to calibrate and determine corresponding benchmarks and baselines for specific SPTs;

Whether specific SPTs, benchmarks, and baselines need to be reviewed externally during the approval stage;

Any specific definitions, methodologies, or assumptions;

After the evaluation stage, whether the borrower's performance against the SPT under each KPI requires external verification, how it is verified externally, and whether it is specific to each KPI;

Determine the borrower's calculation methodology for the performance of the SPT under each KPI.

(5) Triggering of pricing discounts/premiums (including the amount that satisfies the SPT to trigger a margin ratchet clause).

(6) The level of margin discounts/additions applicable, and the applicable scenarios.

(7) Revise the voting requirements for KPIs/SPTs after the review stage.

(8) Whether margin discount reinvestment is applicable and relevant requirements.

（2） Determination of KPIs/SPTs after loan issuance, including:

(1) Whether and when KPIs/SPTs need to be determined, including any external review requirements.

(2) Restrictions on promotional transactions before KPIs/SPTs are met.

(3) Approve voting requirements for KPIs/SPTs.

（3） The announcement requirements for ESG information include:

(1) Initial and ongoing ESG information announcement time requirements.

(2) The scope and content of initial and ongoing ESG information announcements.

(3) Details of ESG information announcements (such as disclosures in annual reports).

(4) Requirements related to audit/external review (during and after the review stage).

(5) Consequences of not disclosing ESG information or providing inaccurate/incomplete ESG information.

（4） Provide details of ESG information in the transaction prerequisites.

（5） Disclosure of details of investment in any clean/public welfare project.

2、 Conclusion

The above comprehensive terms are intended to help investors better analyze risks, invest in new projects, and increase market liquidity. LMA acknowledges that these terms do not cover all the contents of the investor's term sheet, but there is no doubt that these terms basically cover the risk points related to this stage of work, providing investors with a comprehensive work guide that is worth learning from for creditors in Asia.