Mezzanine Loan Term Sheet Template for Canada

A mezzanine loan term sheet is your roadmap for structuring complex financing that combines debt and equity features under Canadian law. This preliminary document establishes the framework for mezzanine financing before you commit to extensive legal documentation and due diligence processes.

When do you need this document?

You need a mezzanine loan term sheet when your company requires growth capital or acquisition financing that traditional bank debt cannot fully support. This situation commonly arises during leveraged buyouts, management buyouts, recapitalizations, or expansion projects where your debt capacity is limited but you want to minimize equity dilution. Mezzanine financing typically fills the gap between senior debt and pure equity, offering flexible repayment terms and often including equity participation through warrants or conversion features. The term sheet becomes essential when negotiating with mezzanine funds, private debt providers, or institutional lenders who require clarity on fundamental deal terms before proceeding with detailed documentation.

Key legal considerations

Your mezzanine loan term sheet must carefully address subordination mechanics, as this financing sits below senior debt but above equity in the capital structure. The document should clearly define payment-in-kind (PIK) interest provisions, cash interest rates, and any step-up mechanisms that may apply over the loan term. Security arrangements require particular attention, especially regarding intercreditor agreements with senior lenders and the scope of collateral coverage. If your term sheet includes equity participation features such as warrants or conversion rights, these must comply with securities law requirements. The subordination provisions should specify payment restrictions, enforcement limitations, and standstill periods that protect senior lender interests while providing adequate flexibility for your operations.

Legal requirements in Canada

Canadian mezzanine loan term sheets must comply with the federal Interest Act, which governs interest rate disclosure and calculation methods, particularly important for PIK components and compounding mechanisms. The Criminal Code Section 347 sets maximum allowable interest rates, requiring careful calculation of the total cost of borrowing to ensure compliance with criminal interest rate provisions. Provincial Personal Property Security Act requirements apply to any security interests granted over personal property, necessitating proper registration and priority arrangements. When equity components are involved, provincial Securities Acts impose disclosure obligations and may require regulatory filings or exemption compliance. The Canada Business Corporations Act governs any corporate actions required for equity participation features, including board approval processes and shareholder rights. Your term sheet should also address Business Corporations Act requirements for any changes to capital structure or director appointments that may result from the mezzanine financing arrangement.