The moment a sponsor receives indicative terms is sometimes treated as the moment the financing is done. The leverage is there, the pricing works, and the model finally closes. In practice, that document is often the starting point of the process. The facility that reaches credit committee and is eventually signed tends to be smaller, carry more conditions and sometimes cost more. The sponsor who budgeted on the headline figure finds out in due diligence, when changing course is most expensive.
This happens for structural reasons. Indicative terms are usually written by the origination side, from a summary, before the lender has instructed its own valuation or read the full file. The originator’s job is to win the mandate, so the terms describe what the lender could do if everything checks out. Credit approves on what the file actually shows. Most of the gap between those two positions sits in one phrase that appears throughout every term sheet: subject to.
What moves between indicative and approved is fairly predictable. Leverage is the first to go. The lender’s valuer comes in below the sponsor’s, or the loan-to-cost is measured against the lender’s view of cost rather than the sponsor’s budget, and a quoted 70% becomes 63% without anyone changing the ratio. Conditions come next: pre-sales or pre-lets before first drawdown, the sponsor’s equity going in first, an interest reserve, a cost overrun guarantee, a cash sweep. Pricing usually holds on the margin and moves elsewhere, through floors, exit fees and extension fees. Each change is defensible on its own, but together they can take a sponsor’s equity requirement well beyond the plan.
Not every indication carries the same weight, and the document itself shows which kind it is. A few questions separate them. Has anyone from credit seen the deal, or only the originator? Is the leverage based on a value the lender has tested, or on the sponsor’s appraisal? Are the conditions precedent specific to this deal, or a generic list that will be written properly later? Are the key definitions in the term sheet at all? The same covenant reads very differently depending on whether loan-to-value is measured on the gross or the net facility, or whether debt service cover is tested on actual or projected income. A term sheet that settles those points has been worked on. One that leaves them for the facility agreement has simply postponed the negotiation.
Once the term sheet is signed, the process moves into full due diligence. Everything discussed until then, including the valuation, the cost plan, the equity, the leases and the planning position, now has to be verified. Where the evidence differs from the summary, the terms follow the evidence. The practical question for a sponsor is how to make sure that gap is small. In practice that means four things.
First, negotiate the definitions, the covenant tests and the conditions precedent before signing, not the headline numbers alone. Those clauses are where the facility is actually decided, and they cost nothing to settle while there is competition.
Second, find out where the deal sits internally. Asking whether terms have been pre-screened by credit, and what credit is likely to focus on, is a normal question, and the answer tells you how much weight to put on the document.
Third, put the weak points on the table before diligence finds them. A planning condition, a gap in the cost plan, a tenant with a break option: credit will find all of these. Found early, they get built into the terms. Found late, they reopen them.
Fourth, keep one credible alternative warm until credit approval is in writing. It doesn’t need to be a parallel process, just a conversation that can be restarted. Its value is mostly in the fact that the lender knows it exists.
A sponsor should also model the deal on terms likely to be approved, not the indicative ones. If the scheme only works at the top of the range, that is worth knowing before exclusivity rather than after.
The number worth celebrating is the credit-approved one. Everything before it is an opening position, reasonable and usually made in good faith, but still an opening position. The sponsors who close on terms close to the ones they were first shown are rarely the ones who got lucky with their lender. They are the ones who assumed from the start that the terms would move, and did their negotiating while they still had choices.