Mezzanine Loan Term Sheet Template for Hong Kong

A mezzanine loan term sheet is a foundational document that outlines the key commercial and legal terms for hybrid financing arrangements in Hong Kong. This document serves as a roadmap for transactions that combine debt and equity features, typically involving subordinated debt with equity-linked components such as warrants or conversion rights. You'll use this document to establish the framework before drafting comprehensive facility agreements and related security documentation.

When do you need this document?

You need a mezzanine loan term sheet when your company requires capital that falls between senior debt and equity financing. This commonly occurs during expansion phases where traditional bank lending limits have been reached, acquisition scenarios where additional leverage is needed beyond senior facilities, or real estate development projects requiring flexible capital structures. Private equity transactions often utilize mezzanine financing to optimize capital structures and reduce equity requirements. The term sheet becomes essential when multiple parties including senior lenders, mezzanine providers, and equity investors need clear subordination and intercreditor arrangements.

Key legal considerations

Your mezzanine loan term sheet must carefully address subordination provisions that define payment priorities relative to senior debt, ensuring compliance with intercreditor arrangements. Security packages require detailed consideration, particularly when mezzanine lenders take secondary charges over company assets or rely on guarantees from related entities. Interest payment structures often include payment-in-kind provisions that allow deferral of cash payments, requiring careful documentation to avoid corporate benefit issues. Conversion rights or equity kickers must be structured to comply with securities law requirements and company constitutional documents. Default provisions need tailoring to reflect the subordinated nature of mezzanine debt, often with limited enforcement rights during senior debt workouts.

Legal requirements in Hong Kong

Under Hong Kong law, your mezzanine loan documentation must comply with the Companies Ordinance regarding registration of charges, corporate borrowing powers, and financial assistance provisions. The Money Lenders Ordinance may apply depending on the lender's licensing status, though corporate lending arrangements typically benefit from exemptions. Security creation requires compliance with the Law of Property Ordinance for real estate charges and proper registration procedures under the Companies Ordinance for company charges. Stamp duty obligations under the Stamp Duty Ordinance apply to loan documentation and security instruments, requiring careful calculation and timely payment. If conversion features are included, Securities and Futures Ordinance compliance becomes relevant for any prospectus or disclosure requirements. Directors must ensure adequate corporate authority exists for borrowing arrangements and that transaction terms satisfy director duties under the Companies Ordinance.