Letter of commitment

Letter of commitment
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Letter of commitment is a written offer, variously called a "engagement letter", "term sheet" or "mandate letter". This document summarizes the borrower's conversations with potential lead managers or lenders [1]. Letter of commitment is not intended to be legal document. Its main purpose is to convey in writing the business understanding between companies. When a letter of commitment is signed, it is usually given to the lawyers to use in writing the legal documents [2].

Preparation of a letter of commitment is the first step to undertaking formal negotiations and a guarantee of good, clear relations between the borrower and the lender. In the case of a syndicated loan, the negotiation of commitment letters can lead to the creation of a document that can be safely shown to syndicate members without fear of fulfilling unrealistic promises [3].

A letter of commitment is a document by an institution undertaking commitments to correct deficiencies that could give rise to unsafe or unsound conditions. Normally, a commitment letter is initiated by an agency and sent to an institution's board of directors, accompanied by a request for the institutions that are in good overall condition but have minor problems in isolated areas of their operations [4].

Structure of commitment letter

The standard letter of commitment contains five basic segments:

  1. The first segment states the terms on which the investment is being made to your company and the terms of any equity option.
  2. The second section states the collateral for the investment and this section usually exist only for mezzanine loans.
  3. The third part talks about the conditions of the investment, both negative and positive. This helps to look more broadly at the possible effects of the contracts signed, future opportunities and potential threats.
  4. The fourth outlines the representations you have made that have induced the venture capital fund to make a commitment.
  5. The fifth part deals with the conditions on which the commitment was made.

Each part is discussed in the following pages [5].

Elements of commitment letter

Each engagement letter should contain the necessary information about the contract. Letter of commitment includes:

  • date and place of conclusion of the contract
  • lender and borrower details
  • general provisions
  • loan amount and currency
  • loan period
  • amount of commission
  • loan repayment rules and dates
  • interest rate
  • loan purpose
  • information on the conditions for changing and withdrawing from the contract by the lender and the borrower
  • Terms and Conditions

References

Footnotes

  1. Gooch A.C., Klein L.B., (1996)
  2. Gladstone D., Gladstone L., (2002)
  3. Gooch A.C., Klein L.B., (1996).
  4. Zisman B. S., (2019)
  5. Gladstone D., Gladstone L., (2002)

Author: Piotr Tarsa