From Term Sheets to Trust Indentures: How to Align Loan and Bond Covenants in English with Effective Agent Bank Communications Phrases

Step 1 – Frame the instruments and the alignment objective

To align loan and bond covenants in English, start by understanding the instruments you are harmonising and why their language naturally diverges. TLA (Term Loan A) is typically amortising, banked, and often anchored by relationship lenders with tighter covenants and more administrative detail. TLB (Term Loan B) is usually institutional money with lighter maintenance features, more borrower flexibility, and market-standard incurrence-style tests. High-yield bonds (often issued under a trust indenture) are predominantly incurrence-based, with greater flexibility, disclosure-driven protections, and longer tenors. Each product reflects a different risk/return profile and investor constituency, which explains stylistic and substantive differences in drafting.

Divergences commonly arise in four areas. First, covenant architecture: loans often include maintenance covenants and detailed baskets that reset less dynamically; bonds emphasise incurrence covenants with leverage and coverage tests applied at the time of taking action. Second, definitions: EBITDA, Consolidated Net Income, and CapEx may be calculated differently, with distinct add-backs and pro forma adjustments. Third, debt capacity: ratio debt and incremental facilities in loans may not mirror the “Fixed Amount plus Ratio Amount” structure prevalent in bonds. Fourth, negative covenants around restricted payments, investments, and liens tend to be structured with different baseline permissions and rebuild mechanics.

Your alignment objective is to minimise substantive drift so that the commercial deal reads consistently across the term sheet, the credit agreement, and the trust indenture. The mindset is not to force identical drafting, but to translate function: ensure the borrower has the same practical flexibility and the creditors receive equivalent protection, even if the instruments use different conventions. An effective alignment mindset uses three lenses:

• Commercial parity: Does an action permitted in the loan also work within the bond, and vice versa? If not, where do you neutralise the gap—by mirroring or by creating a clear carve-out?
• Definition integrity: Are key defined terms—especially EBITDA and net leverage—calibrated so that ratio triggers, baskets, and rebuilds produce parallel outcomes across documents?
• Lifecycle consistency: From closing through amendments, waivers, and refinancings, will the language support predictable approvals, notices, and consent thresholds in both products?

Use a simple checklist at the start of drafting and again before signing: (1) compare covenant families; (2) trace definitions that feed ratios and baskets; (3) reconcile pricing and reference-rate language; (4) align incurrence tests and step-downs; (5) confirm agent and trustee processes for notices, approvals, and reporting. This keeps the team grounded in outcomes rather than stylistic preferences.

Step 2 – Pricing and reference rate language

When aligning pricing terms, adopt concise phrases that read cleanly in both loans and bonds. Keep language factual, sequenced, and free of negotiation tone. For margins, use: “The margin is X basis points per annum over the Applicable Benchmark, subject to the Pricing Grid.” For ratchets tied to leverage or ratings, write: “The margin adjusts pursuant to the Pricing Grid based on the most recent Compliance Certificate (or Rating), effective from the delivery date, with no retroactive application.” This structure is neutral and adaptable to loan schedules or bond provisions.

For MFU (most-favoured-uplift), avoid ambiguity: “If any pari passu debt benefits from a higher margin or coupon for substantially comparable credit risk and tenor, the margin under the Facilities will increase by the differential, subject to a cap of [X] basis points, effective on the date such higher pricing becomes effective.” This phrasing works across a loan side letter or a bond supplemental covenant and clarifies scope, trigger, and cap.

In reference-rate drafting, be specific and modular. For SOFR and TONA, prefer: “The Applicable Benchmark is Term SOFR (or TONA) for the Interest Period, plus the Credit Spread Adjustment, as published and available on the screen page specified in the Reference Rate Annex.” For term rates and compounding: “Interest accrues daily and is payable in arrears on each Interest Payment Date, calculated on the basis specified in the Reference Rate Annex, with the observation shift and lookback as stated therein.” This lets both the loan and bond documents cross-reference a unified annex and reduces the risk of mismatched conventions.

For default interest, keep the rule tight and non-punitive: “Upon an Event of Default and while continuing, overdue amounts bear interest at the applicable rate plus [200] bps, accruing daily and payable on demand (or on the next Interest Payment Date in the case of bonds), without compounding unless required by law.” The bracketed uplift preserves market flexibility while remaining precise.

For break costs (a loan-specific concept), define clearly yet in neutral terms that do not disrupt bond drafting: “If any prepayment of a Term Benchmark Loan occurs on a date other than the last day of the Interest Period, the Borrower shall pay documented break funding costs to each affected Lender.” In the bond, you do not replicate break costs; instead, preserve coherence by ensuring any make-whole or call schedule is defined separately without cross-contamination of terms.

Where fees appear (commitment, ticking, consent), use a consistent tone: “The Borrower shall pay customary fees as set out in the Fee Letter, which form part of the Transaction Documents.” Maintain the same anchor across loan and bond suites so that economic disclosures are complete and aligned.

Step 3 – Covenant translation and mirroring

The heart of alignment lies in covenant translation. Each covenant family has a loan dialect and a bond dialect; your job is to map intent and then choose to mirror or to carve out. Start with debt incurrence. Loans often offer incremental facilities with a “free-and-clear” amount plus a ratio amount tested at incurrence. Bonds use a fixed basket plus ratio debt tested at or below a leverage threshold. Translate with language that preserves total capacity and sequence: define a fixed dollar basket, a builder-style grower basket (greater of fixed amount and percentage of EBITDA or total assets), and a ratio-based capacity tested pro forma. Keep the order-of-use and reclassification rules consistent: “Capacity may be reclassified among baskets to the extent the conditions for the alternative basket are met at the time of reclassification.” This prevents stale capacity from producing different outcomes across documents.

For liens, align the negative pledge by translating secured debt capacity rather than copying loan-style exceptions verbatim. Bonds typically permit liens to secure debt otherwise permitted; loans may define a separate general lien basket with permitted priority. Use parallel conditions: (i) cap the pari passu lien capacity by a ratio test or a dollar basket; (ii) allow junior liens within the same tested capacity; (iii) confirm the intercreditor framework. Ensure the same collateral coverage expectation appears in both documents by cross-referencing the security principles and collateral deliverables.

For restricted payments (RP), harmonise the builder concept and the use-of-proceeds logic. The bond often includes a builder basket based on Consolidated Net Income, with step-ups upon achieving a leverage threshold and carve-outs for a de minimis amount, equity-for-debt exchanges, and certain tax distributions. Loans may feature RP flexibility conditioned on no Event of Default and pro forma compliance with a leverage or interest coverage test. Translate by using the same builder definition, the same measurement of CNI, and an identical approach to reclassification: “An RP made under the General Basket may be reclassified as made under the Ratio Condition Basket if the Ratio Condition is satisfied at such time.” Keep the trigger ratios consistent; otherwise, the company could act under one instrument but be blocked under the other.

For investments, mirror the logic used for RPs: define a general investment basket, a ratio-based basket, and specified carve-outs for cash management items, existing subsidiaries, and reinvestment of returns. State explicitly that “Investments are tested at the time made and are permitted to remain outstanding notwithstanding subsequent changes in value,” which aligns with bond incurrence logic and prevents accidental breaches in the loan.

For EBITDA and definitions, harmonise the engine that powers ratios. Set a single hierarchy of adjustments: run-rate synergies/add-backs subject to a cap and time limit; non-recurring charges; restructuring costs; stock-based compensation treatments; and pro forma treatment for acquisitions and dispositions. Use consistent measurement periods and certification mechanics: “Pro forma adjustments must be reasonably identifiable and factually supportable, as certified by a Responsible Officer.” This single definition allows ratio debt, RP step-downs, and incremental capacity to align across instruments.

For baskets, articulate the grower concept identically: “The amount is the greater of a fixed dollar amount and [X]% of LTM EBITDA (or Total Assets, as specified).” State the rebuild mechanic for builder baskets in the same way in both documents, making it clear whether the basket rebuilds with positive CNI and decreases with losses. Use the same rules for redetermination dates and for temporary cash build-ups.

For portability, if included, keep the same threshold test, the same required ratings or leverage condition, and the same no-default condition. Clarify event sequencing: “Portability applies to the change of control covenant if, prior to consummation, the Company satisfies the Portability Condition as evidenced by a Compliance Certificate (or an officers’ certificate in the indenture).” This keeps a potentially sensitive feature consistent across the stack.

A general rule for “mirror vs. carve out”: mirror where the concept is directly translatable with equivalent risk; carve out where the product architecture differs (for example, maintenance covenants in loans do not belong in bonds). When carving out, use neutral bridging text: “For the avoidance of doubt, the maintenance covenant in the Credit Agreement is not incorporated by reference and no analogous covenant applies under the Notes.” This avoids implied obligations.

Step 4 – Agent bank communications

Documentation alignment collapses without aligned communications. Agent banks and trustees rely on precise, neutral language to summarise issues, collect consents, and record decisions. Use sentence stems that mirror documentation style, avoid advocacy, and state conditions clearly.

When summarising issues, prefer: “We refer to the proposed action described below and set out the relevant provisions for your review. The Borrower requests approval pursuant to Section [X] (Consent Threshold: Required Lenders).” Then list the key conditions in the same sequence as the covenant. This helps holders check the text against the document without guessing intent.

When requesting approvals, be explicit about tests: “The Borrower seeks to incur additional debt under the Ratio Debt basket. Pro forma for the incurrence and related transaction, First Lien Net Leverage is [x.x]x, which is at or below the permitted [y.y]x threshold. The Borrower confirms no Event of Default and delivery of the Compliance Certificate as conditions precedent.” This mirrors the covenant incurrence logic—test, threshold, no default, certification.

When minuting decisions, keep the record factual: “Following circulation of the Consent Solicitation on [date], holders representing [percentage] of Commitments (or principal amount outstanding) consented by [deadline]. The Agent confirms receipt of required consents and effectiveness of the amendment as of [time and date], subject to satisfaction of the conditions set out in the Execution Notice.” This protects the administrative record and aligns with the execution mechanics.

For conditional approvals, use if-then clarity: “Subject to receipt of the Officer’s Certificate, legal opinions, and updated financials as specified in Annex A, the Lenders approve the Transaction. If any condition is not satisfied by [longstop date], the approval shall lapse without further action.” This avoids ambiguity about conditionality and timing.

For information distribution, maintain neutral cover language: “Please find attached the draft supplemental indenture and revised schedules. Redlines reflect changes to covenant capacity to align with the Credit Agreement as described in the Summary of Changes. No other modifications are intended.” This signals the scope of change and reinforces the alignment objective.

Finally, maintain a common glossary across your communications: capitalise defined terms exactly as in the documents, cite section numbers precisely, and avoid introducing casual synonyms. Where instruments use different labels for the same concept, include a one-line bridge the first time you use it: “Ratio Debt (Incremental Ratio Facility under the Credit Agreement).” The more disciplined your language, the less friction between stakeholders and the stronger the internal consistency from term sheet to trust indenture.

By applying this four-step approach—framing the instruments and the alignment goal, standardising pricing and benchmark language, translating covenant families with a mirror-or-carve decision framework, and adopting clear agent bank communication stems—you create a coherent, market-credible package. The English you choose is concise, neutral, and cross-functional; it can be lifted across documents without rewriting. This is how you move confidently from term sheets to trust indentures while keeping loan and bond covenants aligned and intelligible to all parties.