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are documents issued by lenders to companies after they have decided to make a loan but before they are ready to complete the formal loan documents. Commitment letters are usually short and describe only the essential terms of the pending loan. Most commitment letters obligate the lender to make the described loan only if the company meets all of the conditions identified in the letter. Once the conditions are met, the commitment is further documented with more complete (lengthy) loan, security, and guarantee agreements that contain many terms and conditions not specified in the commitment letter. Commitment letters serve a useful purpose. By setting out the general terms of the loan, they solidify each party's commitment to move forward with the deal. They also insure that the parties have, in fact, come to terms with one another on the major points of the deal. Commitment letters should not be treated lightly. They should be reviewed as carefully as the final, formal loan documents they precede. Even though many of their provisions may not be legally binding (at least until all the conditions are met), some may be enforceable against the company in any event. Also, these letters set the tone for how negotiations of the formal loan agreements will proceed. Both parties will expect the deal to be completed in the manner set out in the letter. As a result, it can be very difficult to negotiate and close a loan that includes terms significantly different from those contained in an earlier commitment letter. See: Bridge Loans, Investment Memorandums, Letter Agreements, Letters of Intent. |
