How to read a Lombard term sheet.

A Lombard loan term sheet summarises the facility a lender proposes: how much it will lend against which shares, at what cost, and what happens if the collateral falls or the borrower defaults. The clauses that matter most are the advance rate, the maintenance ratio and cure period, custody, and enforcement, including who keeps any surplus.

What is a Lombard loan term sheet?

A Lombard loan term sheet is the lender’s outline of a proposed facility against pledged listed shares or a securities portfolio, set out before the facility agreement and security documents are drafted.

A term sheet may state that it is indicative and that nothing binds either side until those documents are signed, while some of its clauses, such as confidentiality, exclusivity or costs, may bind at once. The firm’s own indicative term sheet carries no commitment on either side until documentation is signed, as the process explains.

Each clause below opens with what it says, followed by why it matters and how it varies between lenders, with borrower-unfavourable variants named plainly. No fee level, advance rate, ratio or period is given, because each is agreed for a specific facility. This page is general information, not legal advice.

What does the term sheet say about the loan itself?

The loan clauses set how much can be borrowed and on what basis: the amount and any tranches, the advance rate and the price it is applied to, the interest basis, the fees, the tenor, and the terms for repaying early.

Amount and tranches

The amount clause states the most the lender will advance, in which currency, and whether the loan is drawn in one amount or in tranches: separate drawings, each of which may depend on conditions being met at the time it is drawn.

Why it matters. The amount on the term sheet is a ceiling, not a promise of cash. Where a later tranche must pass a fresh advance-rate test, a fall in the share price before it is drawn can shrink it or stop it, which matters when the money is earmarked for a fixed payment.

How it varies. Some lenders commit to the full amount for an availability period, which may carry a commitment fee on the undrawn part; others treat each drawing as uncommitted. Some allow drawings in a currency other than that of the shares, which brings the exchange-rate risk set out in cross-currency Lombard loans. A facility that can be drawn, repaid and redrawn within its limit is a Lombard credit line.

Advance rate and the price used

The advance rate clause sets the percentage of the collateral’s value the lender will lend, which is the loan-to-value at drawdown, and the price used to value the shares, such as the last closing price or a volume-weighted average price (VWAP) over a set period.

Why it matters. The advance rate and the price together fix the cash released and the starting distance from a margin call. On a volatile share the choice of price matters: a VWAP taken over several days smooths a single day’s spike or fall, while a closing price taken on a strong day lifts the advance and narrows that distance.

How it varies. Some lenders set one rate for the whole portfolio, others a rate for each line, with lower rates for concentrated or less liquid holdings. Some reserve the right to change advance rates or eligibility during the facility. What drives the rate itself is set out in how much you can borrow against shares.

Pricing: fixed, or reference rate plus spread

The pricing clause states how interest is charged: either a fixed rate for the term, or a floating reference rate in the loan’s currency, such as SOFR, SONIA, EURIBOR or SARON, plus a spread, together with when interest is paid and the rate charged on overdue amounts.

Why it matters. A floating rate moves with the benchmark, so the cost of the loan changes over its life; a fixed rate gives certainty but may carry break costs if the loan is repaid early. Interest that is added to the loan rather than paid lifts the loan-to-value over time, bringing a margin call closer even if the shares do not fall.

How it varies. Lenders differ on the spread, on whether a floor stops the reference rate falling below a set level, on interest periods, and on whether interest may be rolled up. Some offer a fixed rate only for certain currencies and tenors. How the spread is set is covered in Lombard loan interest rates and costs.

Fees: origination, arrangement and administration

The fees clause lists what the borrower pays besides interest: upfront fees such as an origination fee or arrangement fee, ongoing administration, agency or custody fees, and costs such as legal and valuation fees, with when each is due.

Why it matters. Fees change the true cost of the facility, and upfront fees most of all: they are paid at the outset however long the loan runs, and where they are deducted from the advance, the borrower receives less cash than the headline amount.

How it varies. Names vary: one lender’s origination fee is another’s arrangement or upfront fee, and some charge several. Some build their costs into the spread; others charge high upfront fees, which is borrower-unfavourable because the cost is paid in full however soon the loan is repaid. Ongoing administration fees, and any fee for leaving early, belong in the same comparison.

Tenor and extension

The tenor clause sets how long the facility runs and when it must be repaid, and the extension clause says whether, and on what terms, it can be rolled over at maturity.

Why it matters. A borrower whose need outlasts the tenor faces refinancing at maturity, on whatever terms and at whatever share price prevail then. If the facility bridges to a known event, such as the end of a lock-up, the tenor should leave room for that event to slip.

How it varies. Some lenders grant an extension at the borrower’s option if conditions are met; others extend only at their discretion, or for a fee. Some facilities are repayable on demand whatever their stated term, as US securities-based lines of credit are: FINRA’s guidance describes them as demand loans that the lender may call at any time.

Prepayment and lock-outs

The prepayment clause says whether the borrower may repay early, with how much notice and at what cost, including any prepayment lock-out during which early repayment is barred or carries a fee, and any events that force repayment.

Why it matters. A long lock-out is borrower-unfavourable: it can leave the borrower paying interest on cash it no longer needs, and if it also bars part repayments, it removes one way of answering a margin call. Mandatory prepayment events, such as a cash takeover of the issuer, can end the facility early whether or not the borrower wants to repay.

How it varies. Some lenders allow repayment at any time with notice; others charge a fee that falls over time, or require the interest that would have been earned to the end of a lock-out. A term sheet may exempt repayments made to meet a margin call, which is worth confirming in writing.

Which shares can be pledged, and who controls them?

The collateral clauses say which shares the lender accepts, what can be added or swapped later, and where the shares are held, in whose name and through which custodians, which decides who controls them during the loan.

Eligible collateral and top-ups

The eligible collateral clause lists the securities the lender accepts, judged on listing, liquidity and free float and subject to any concentration limits, and says what may be added or substituted later, including which assets count as a top-up.

Why it matters. A share that stops qualifying, for example after a suspension of trading, may lose its lending value at once, creating a shortfall without any fall in the wider market. The range of assets accepted as a top-up decides how easily the borrower can answer a margin call from what it already holds.

How it varies. Lenders differ on the markets they accept, on minimum liquidity, and on whether restricted shares or shares under a lock-up qualify. A term sheet may require the shares to be freely tradable and free of existing liens. Some lenders allow collateral to be substituted freely; others need their consent for each change.

Custody and control

The custody clause says where the pledged shares are held, through which custodian and sub-custodians, in whose name, and how the lender controls them: a pledge over the borrower’s own account, a control agreement, or a transfer into the lender’s account.

Why it matters. Custody decides who can move the shares and what happens if an intermediary fails. Shares held in the borrower’s name under a pledge stay the borrower’s; shares moved into the lender’s name, or subject to a right of re-use, may leave the borrower with only a claim for equivalent shares. The legal routes are set out in how a Lombard loan is secured.

How it varies. Some lenders hold the shares with a custodian in the market where they are listed; others hold them through their own custodian abroad and a chain of sub-custodians, which can be simpler for the lender. Custody outside the shares’ home market is borrower-unfavourable: it puts more intermediaries and legal systems between the borrower and the shares, and can make them slower to recover.

The custodian’s settlement instructions say where the shares are to be delivered; they are not cash payment details, and any request for money presented as settlement instructions should be checked directly with the custodian.

What happens to the collateral during the loan?

During the loan, the collateral is revalued against a maintenance ratio, with a cure period if the ratio is breached, and dividends, votes and corporate actions are handled as the documents provide. Together these clauses decide how a fall in the shares, or a corporate event, plays out.

Valuation and maintenance

The valuation and maintenance clause sets how often the collateral is valued, the maintenance ratio the facility must stay within, the valuation events that allow an extra valuation, the cure period after a margin call, and whether a shortfall is cured in cash, shares or repayment.

Why it matters. The maintenance terms decide how large a fall the facility can absorb and how long the borrower has to respond. A short cure period is borrower-unfavourable: it can leave too little time to move cash or shares between custodians and time zones before the lender may sell. A lender secured on a volatile share will argue that a longer wait exposes it to further falls.

How it varies. Lenders differ on the ratio, any warning level before a call, the cure period and the list of valuation events. A term sheet that accepts top-ups only in further shares, not in cash or by part repayment, is borrower-unfavourable: it narrows the ways to cure, and topping up with more of the same stock deepens the exposure to it. Some agreements let the lender raise the required collateral during the loan.

How a call unfolds, and how to keep clear of one, is set out in margin-call risk in a Lombard loan.

Dividends, votes and corporate actions

The corporate actions clause says who receives dividends and votes the shares while the facility performs, and how splits, rights issues, mergers and takeovers are handled, including whether new shares join the pledge and whether a cash offer forces repayment.

Why it matters. Keeping income and votes may be the reason for borrowing rather than selling, particularly for founders and controlling shareholders. A rights issue or takeover changes what the collateral is, and the documents decide whether the borrower can take up rights, how a share exchange is treated, and what happens to cash proceeds.

How it varies. Some lenders release dividends to the borrower while the facility performs and apply them to the loan only after a breach; others sweep all income to the loan account. Some restrict voting after a default, or in a contested situation. The events are covered in dividends and corporate actions in a Lombard loan.

What happens on default?

On an event of default the lender may demand repayment and enforce its security, for example by selling the shares. The default and enforcement clauses decide when that right arises, how the sale is run, how far the lender can reach beyond the collateral, and who keeps any surplus. Both are legal terms to review with counsel; this section is general information, not legal advice.

Events of default

The events of default clause lists what allows the lender to end the facility early and enforce, such as non-payment, an uncured margin call, a breach of other terms, an untrue statement, insolvency, or the delisting or suspension of the shares.

Why it matters. The list defines when the borrower stops being in control. A default does not need a fall in the share price: a missed filing, a late payment or a default on unrelated debt can be enough if the clause says so.

How it varies. Lenders differ on grace periods for curing a breach, on materiality tests, and on cross-default, which can turn a default on other borrowing into a default here. A material adverse change clause, especially one framed as the lender’s opinion, lets the lender call a default on its own judgement, which is borrower-unfavourable because the trigger is not objective. Lenders see such clauses as cover for risks the listed events miss.

Enforcement and recourse

The enforcement clause says what the lender may do after a default, such as selling the shares or taking them at an agreed value, what notice it must give, how the proceeds are applied, and how far it can reach beyond the collateral for a shortfall.

Why it matters. Enforcement sets the borrower’s worst case. Under full recourse the borrower owes any shortfall after the sale; under non-recourse the lender looks to the collateral alone, as non-recourse Lombard loans explains. Where the sale raises more than the debt, the documents should require the surplus to be paid to the borrower.

How it varies. Some term sheets require notice and an orderly sale; others let the lender sell at once, at whatever price it can obtain. A term sheet that lets the lender keep the shares, or all the proceeds, whatever their value, is the most borrower-unfavourable variant, because a default on a small amount can cost the whole position. Whether such a term is valid depends on the governing law: check with local counsel.

What are the legal and closing terms?

The legal and closing clauses set which law governs the loan and the pledge, where disputes are decided, and what must happen before any money is paid, from identity checks to the delivery of the shares into custody.

Governing law and dispute resolution

The governing law clause names the law that governs the loan agreement, and sometimes a different law for the pledge, which may be the law of the place where the custody account is kept; the dispute clause says which courts or arbitration will decide a disagreement.

Why it matters. The governing law decides how every other clause is read and enforced, including whether the borrower must be given notice before a sale and is owed any surplus. A borrower bound by an unfamiliar law, in a distant forum, may find a dispute slow and costly to bring.

How it varies. Some lenders use the law of their own base for the loan and the law where the shares are held for the pledge. Some term sheets let only the lender choose where to sue while binding the borrower to one court, which is borrower-unfavourable. Governing law is legal content: take legal advice in each relevant jurisdiction, and check with local counsel how the pledge is perfected and enforced where the shares are held.

Conditions precedent and KYC

The conditions precedent clause lists what must be done before the first drawing: know-your-customer and anti-money-laundering checks, signed documents and approvals, any legal opinions, the opening of the custody account, the delivery of the shares, and the steps that perfect the pledge.

Why it matters. Conditions precedent set the timetable and decide when the borrower is exposed. Know-your-customer checks cover identity and source of wealth and, where the lender requires it, professional-investor status; the firm’s own requirements for borrowers and collateral are set out in who qualifies for a Lombard loan. If the shares must be delivered before the loan is funded, the borrower should know what protects it if funding does not follow.

How it varies. Lenders differ on the depth of their checks, on the documents they need from companies and trusts, and on whether a condition is objective or met only to the lender’s satisfaction, which leaves the lender room to decline to fund. Some charge fees, or recover legal costs, even if the facility never completes.

What should a borrower check in each clause?

The checklist sets each clause against what to check before signing; the same answers should appear in the term sheet and in the final facility documents.

The checklist is general information, not legal advice. Governing law, enforcement and recourse depend on the documents and on the law that applies to them, so review those clauses with counsel in each relevant jurisdiction before signing.