This article explains how private equity sponsors should manage the private credit term sheet process, compare multiple lender proposals, negotiate debt financing terms and avoid common execution problems before legal documentation begins.
This is the second in a three-part series on the private credit deal cycle. Part one covers bookbuilding. Part three covers managing lenders post-close.
For a private equity sponsor, the term sheet stage of a debt financing is not an administrative formality. The terms agreed at this stage — the margin, the covenants, the reporting obligations, the call protection, the flexibility to make acquisitions or pay dividends — directly shape how the portfolio company can operate for the life of the loan. A sponsor who negotiates well at the term sheet stage gives the business more room to grow, more flexibility to navigate downturns, and a lower cost of debt that feeds directly into returns. A sponsor who focuses only on headline pricing and misses the detail buried elsewhere in the document can find their portfolio company constrained at exactly the wrong moment.
This post explains how the term sheet process works in private credit, what to focus on, and how to run a comparison across multiple lenders without losing weeks to document chaos.
A term sheet is a document setting out the key commercial terms on which a lender is prepared to provide debt financing. It is typically non-binding — a statement of intent rather than a legal commitment — but it is far from preliminary. In private credit, as Haynes Boone note in their analysis of private credit documentation, commitment papers that are standard in the syndicated market are often skipped entirely, with an agreed non-binding term sheet taking their place. Once the term sheet is agreed, the lender may be expected to deliver full legal documentation within five business days or less.
That timeline matters. It means the term sheet is effectively the last stage at which a sponsor has meaningful leverage to push for better terms before lawyers get involved and the process shifts from commercial negotiation to legal drafting. What gets agreed in the term sheet tends to stick.
It also means the term sheet stage is more consequential in private credit than many junior dealmakers realize. In the syndicated market, terms are heavily influenced by market precedent and what a large group of investors will accept. In private credit, terms are negotiated directly between the sponsor and a small group of lenders — which creates both more flexibility and more responsibility to push for what the portfolio company actually needs.
One of the things that trips up less experienced dealmakers is the assumption that term sheets come after bookbuilding. In practice, the two processes run concurrently.
While the sponsor is building a picture of lender demand through the bookbuilding process, lenders are simultaneously submitting term sheets setting out the commercial terms on which they are prepared to lend. Sponsors will often invite more lenders to submit term sheets than will ultimately be allocated — deliberately using the competitive tension of multiple bids to push for better terms across the board before narrowing down to a final lender or lending group.
This means the sponsor is managing two demanding parallel workstreams at the same time: tracking demand and indications through bookbuilding, and comparing and negotiating term sheets across multiple lenders. The operational load is significant — and in most firms, it falls on a small core team.
Private credit term sheets cover a wide range of commercial terms. Not all of them receive equal attention during negotiation — and the ones that get overlooked are often the ones that matter most.
The headline interest rate is where most people start, but it is rarely where the real economics are. The all-in cost of a private credit facility includes the margin, the original issue discount (OID), arrangement and closing fees as well as commitment fees on undrawn amounts. OID in particular is easy to underestimate — it reduces the net proceeds the borrower receives at close and increases the effective cost of capital. A facility with a slightly lower margin but a higher OID and heavier fee structure can end up more expensive than one with a higher stated rate and cleaner economics.
PIK interest — where some or all of the interest is added to the loan balance rather than paid in cash — is another feature worth examining carefully. It can be genuinely useful for growth businesses that need to conserve cash, but it compounds the debt burden over time and lenders typically charge a premium for the privilege.
Covenants are the terms that govern how the portfolio company can operate during the life of the loan. They come in two broad types: maintenance covenants, which require the borrower to meet specific financial tests at regular intervals regardless of whether they are doing anything in particular, and incurrence covenants, which only apply when the borrower takes a specific action such as making an acquisition, paying a dividend or raising incremental debt.
Private credit facilities have traditionally featured tighter maintenance covenants than syndicated loans, reflecting the buy-and-hold nature of direct lenders. However, as competition in the private credit market has intensified, covenant packages have become more borrower-friendly, with more flexibility built in. The key questions for any covenant are: how much headroom does the portfolio company have under a realistic downside scenario, and what happens if the covenant is breached? Equity cure rights — which allow the sponsor to inject equity to remedy a covenant breach — are an important protection worth negotiating explicitly.
Reporting requirements are one of the most underestimated elements of a term sheet. Monthly financial reporting, compliance certificates, budget variances, borrowing base certificates, and periodic field exams or appraisals all create an ongoing operational burden for the portfolio company. In a business with a lean finance function, heavy reporting requirements can consume significant management time and create friction with the lender if deadlines are missed. Negotiating the frequency, scope, and cost allocation of reporting obligations at the term sheet stage — before they become embedded in the credit agreement — is time well spent.
Call protection governs what it costs to refinance, reprice or repay the loan early. Hard call periods, soft call premiums, and make-whole provisions all affect how much flexibility the sponsor has to refinance if rates improve or the business outperforms. A sponsor who anticipates wanting to refinance within two or three years should pay close attention to the call protection terms and model the all-in cost of early repayment before agreeing to them.
Negative covenants restrict what the borrower can do without lender consent — taking on additional debt, making acquisitions, paying dividends, selling assets, or making management changes. The baskets and carve-outs within these covenants determine how much operational flexibility the portfolio company retains. A well-negotiated negative covenant package gives the business room to pursue its value creation plan. An overly restrictive one can require lender consent for routine operational decisions, creating delay and friction at exactly the moments when speed matters.
Most private credit facilities are senior secured, typically with a first-priority lien over all assets of the borrower and its material subsidiaries. The collateral package matters both at origination — where perfecting security interests requires careful drafting and filing — and in a distressed scenario, where the collateral position determines recovery outcomes. Second lien and subordinated structures require additional attention to where the lender sits in the capital structure and what assets may be carved out.
When multiple lenders submit term sheets, the comparison process is where many deals lose momentum. Term sheets arrive in different formats — some in Word, some in Excel, some as PDFs. Each lender uses slightly different definitions, structures their fees differently, and presents their covenants with varying levels of detail. Comparing them accurately requires converting everything into a common framework, which most teams do manually across a combination of emails, shared documents, and spreadsheets.
The operational reality is messy. Redlines come back over email. Updated versions get saved with inconsistent names. Junior team members spend hours hunting for the latest version of a specific lender’s position on a specific term. The sponsor’s ability to maintain a clear, accurate picture of where each lender stands — and to use that picture to drive competitive tension — degrades as the process drags on.
A structured comparison matrix, covering all-in economics, closing conditions, covenant headroom, reporting burden, flexibility, and call protection, forces the team to compare what actually matters rather than chasing cosmetic differences in headline rate. It also makes it much easier to go back to lenders with targeted asks — pushing lender A to match lender B’s covenant package, or using lender C’s pricing as leverage on fees elsewhere.
This is where Termgrid’s digital term sheet functionality makes a material difference. Rather than managing term sheets across email chains and multiple document versions, sponsors can digitise the process — uploading term sheets, comparing terms side by side, tracking redlines, and building a searchable repository of agreed terms that builds institutional knowledge over time. The heatmap functionality gives instant visibility into where lenders differ, and the online and offline capability means teams can work in whatever format suits them before syncing back to the platform.
Given that private credit lenders are competing aggressively for quality deals, sponsors which own good credits have more leverage at the term sheet stage than is often appreciated. A few areas where it is worth pushing hard:
Covenant headroom. Model your base case and a realistic downside, and negotiate headroom that gives the business room to absorb a bad quarter without triggering a covenant breach. The definitions matter as much as the levels — EBITDA addbacks, pro forma adjustments, and the treatment of one-time items can all move the effective headroom significantly.
Reporting frequency. Monthly reporting is manageable for some businesses and genuinely burdensome for others. Where the lender’s credit case does not depend on monthly visibility, quarterly reporting with annual audited accounts is worth pushing for.
Incurrence baskets. The permitted acquisition basket, capex limits, and restricted payment provisions determine how freely the sponsor can pursue the value creation plan. These are worth spending time on even if they feel like detail — they determine what the business can actually do for the next five to seven years.
Call protection. If you anticipate wanting to refinance within the loan’s life — because the business will outperform, or because rates may fall — model the cost of early repayment under different scenarios and negotiate accordingly.
Equity cure rights. Negotiate explicit equity cure rights with clear mechanics and limits. These are an important safety valve if the business hits a rough patch.
It is worth being explicit about why term sheet negotiation matters beyond process efficiency. Every basis point of margin saved on a leveraged buyout reduces the portfolio company’s annual interest burden. More headroom in the covenants reduces the risk of a technical default that forces an expensive waiver or amendment process. A lighter reporting burden frees up management time for running the business rather than producing lender reports. Flexibility to make bolt-on acquisitions without lender consent allows the sponsor to execute the value creation plan at the pace the market requires.
The difference between a well-negotiated term sheet and a poorly negotiated one is not cosmetic. On a significant debt facility, it can run to millions of dollars over the life of the loan and meaningfully affect the outcome for the fund.
Termgrid’s digital term sheet functionality is part of the broader Deal Execution module, which covers the full financing process from NDA management through to closing. For the term sheet stage specifically, it replaces the email-and-spreadsheet patchwork that most teams rely on with a single platform where term sheets can be digitised, compared, redlined, and tracked.
The searchable repository of precedent terms is particularly valuable over time — giving sponsors the ability to compare current lender proposals against precedent terms from previous deals, identify where a lender’s current position has moved, and build institutional knowledge that does not walk out of the door when a team member leaves.
Sponsors using Termgrid report saving around one day per week on their debt financing processes — time that goes back into the deal rather than into managing documents.
Once term sheets are agreed and allocations made, the deal moves into legal documentation — but the sponsor’s role in managing lender relationships is far from over. In part three of this series, we look at how sponsors manage lender relationships post-close, what good portfolio monitoring looks like, and how Termgrid’s portfolio management module gives sponsors real-time visibility across their debt portfolios.
Termgrid is the end-to-end platform for private capital markets. Used by sponsors, lenders, and advisors across more than 1,600 institutions, Termgrid brings structure, speed, and visibility to the debt financing process. For more on how the debt financing process works, read the Termgrid Primers series.
