How to Read a Term Sheet: Eight Things to Check Before You Invest

Every bond, loan note and structured product comes with a term sheet. It is usually two to six pages long, written in plain enough language, and it is the document that the marketing material is summarising. Most investors read the brochure and skip the term sheet. It should be the other way round.

You do not need a legal background to read one well. You need to know where to look.

1. The issuer

Find the full legal name of the entity that owes you the money, its country of incorporation and its relationship to whoever is selling the product. A well-known brand on the cover does not always mean that brand is the issuer.

2. What you are buying

A bond, a loan note, a preference share and a convertible are different things with different rights. The term sheet should say which it is, and whether it is listed on an exchange.

3. The return, exactly

Note the rate, whether it is simple or compounded, when it is paid and from what date it accrues. Look for the words “target”, “expected” or “up to”. They mean the figure is not fixed.

4. The term and what happens at the end

Check the maturity date and whether the product repays automatically or rolls into a new term unless you give notice. If notice is required, note the deadline somewhere you will see it.

5. Security and ranking

If the product is secured, the term sheet should say over what and who holds the security. Ranking tells you who is paid before you if the issuer fails. “Unsecured” and “subordinated” are not reasons to walk away, but they should be reflected in the return.

6. Early exit

Most private investments cannot be redeemed early, or only at the issuer’s discretion. Assume your money is committed for the full term unless the document says otherwise in clear words.

7. Fees and charges

Look for arrangement fees, management fees, and any commission paid to the firm introducing you. Charges taken from your capital on day one reduce the amount that is actually working for you.

8. Who can invest

Many products are restricted to high net worth, sophisticated or professional investors, and exclude residents of certain countries. Those restrictions exist because the product carries risks that are not appropriate for everyone. If you have to stretch to fit the category, the product is probably not for you.

Wording that deserves a second look

• “Capital protected” without saying by whom, and under what conditions.
• “Asset-backed” without identifying the assets.
• “Guaranteed” where the guarantor is a company in the same group as the issuer.
• Any statement that the term sheet is a summary and that another document prevails. Ask for that other document.

If something in a term sheet is unclear, ask for it to be explained in writing. A good issuer will answer. A vague answer is useful information too.

This article is general information, not personal advice or an offer of any investment. The value of investments can fall as well as rise and you may get back less than you invest. Private credit, structured products and unlisted bonds are higher-risk and are only suitable for investors who can afford to lose the capital they commit. Speak to a qualified adviser about your own circumstances before acting.