Commitment letter

A commitment letter is what allows a buyer to sign an acquisition agreement before any definitive loan documentation exists. It attaches a term sheet as an exhibit and adds the three things the term sheet does not have: the conditions to funding, the flex, and the fee arrangements, which usually move into a separate fee letter so they remain confidential.

Its whole value sits in the conditionality. A commitment conditioned on market conditions, on further diligence, or on the lenders' continued satisfaction is not deal certainty at all, which is why a seller's counsel reads the letter itself rather than accepting a representation that financing is committed. In Europe the standard is certain funds, where the conditions are cut back to a short closed list within the borrower's control.

The dangerous feature is a gap between two condition lists. The acquisition agreement says when the buyer must close and the commitment letter says when the lenders must fund. If the second list is broader, the buyer can be obliged to complete and unable to pay, which is the seller's problem. Sellers close the gap by requiring the financing conditions to be no broader than the closing conditions, and by holding specific performance rights.

What the letter does not fix is price. Market flex lets the arrangers change pricing and some structural terms within negotiated caps if the debt does not clear syndication, so the terms in a commitment letter are the best case rather than the expected case.