Private Credit | 5 Key Clauses in Term Sheets for Foreign Banks, Funds and Investors in Private Credit Transactions in Brazil

Foreign lenders and investors should pay close attention to the preparation of Term Sheets (TS) in private credit transactions in Brazil.

As it constitutes a preliminary contract, TS is an offer of credit that, if it does not provide for key legal clauses of transparency and creditor’s protection, may entail unexpected liabilities.

See below 5 provisions to be observed:

1. Is the Credit Offer Binding on the Lender? This is one of the most important provisions in Term Sheets. The credit line offered binds the lender to grant it, regardless of what occurs until the signing of the credit agreement, or does not bind it, being subject to its best efforts and provided that the borrower satisfies certain conditions precedent (eg. legal due diligence, reconfirmation of financial strength, collateral package, etc.)?

If the credit line offered is not binding, it is essential that it be expressed in the TS to avoid doubts. There are several litigations in which borrowers demanded from lenders the availability of the credit line provided for in TS, which was later canceled, due to lack of forecast as to whether or not it was binding on the TS.

2. Term Sheet Validity Term: Term Sheets must have an express validity/expiration period for the protection of the lender, establishing that, if by date “X” the lender has not received the TS signed by the borrower and any guarantors, it will be automatically canceled, without the need for any further notification or communication.

3. Right to Cancel the Term Sheet: Another important provision for lenders is the right to cancel/terminate the TS at any time, either before or after the signature of the borrower and guarantors.

A number of circumstances may occur between the date the TS is sent to the borrower to sign it and the date of execution of the credit agreement, such as availability of funding, adverse economic and political events, change in the borrower’s financial situation, change in the taxation levied on the credit line, among others.

4. Terms and Conditions Are Not Exhaustive: It is common for Brazilian borrowers to sign Term Sheets and they understand that all the terms and conditions and contractual clauses were provided in them and that the credit agreement should be a mirror of the TS, without innovations.

Therefore, lenders must express in the Term Sheets that the terms and conditions set forth therein are summarized there and that (i) they may be modified and (ii) others will be added, in a format and content satisfactory to the lender.

5. Governing Law and Jurisdiction: TSs must provide for the applicable law and jurisdiction. In general, for the protection of the financier, the governing law must be that of the country (or state, if applicable) of the lender’s business and the jurisdiction of its headquarters.

The provision of these clauses in Term Sheets will generate greater legal protection for lenders while reducing the risk of frustrating borrowers’ expectations, as the rules for the offer of credit are clearly established.

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