A delayed draw term loan, also known as a DDTL, is a specialized feature of a term loan that gives a borrower the ability to withdraw a predetermined portion of the total amount of the loan that has been pre-approved. It is also possible to predetermine the length of the withdrawal periods, which might be every three, six, or nine months.
A DDTL is a provision that is included in the borrower’s agreement, which lenders may offer to companies that have high credit standings. It is common practice to include a DDTL in the contractual loan deals that are made for companies that intend to use the proceeds of the loan to finance future acquisitions or expansion.
Comprehending the Concept of Delayed Draw Term Loans
In order to obtain a loan with a delayed draw term, it is necessary to include specific clauses within the borrowing terms of the financing agreement. For instance, when the loan is first initiated, the lender and borrower may reach an agreement regarding the terms of the loan, such as the borrower being allowed to withdraw $1 million every three months from a loan with a total value of $10 million. A lender is given the ability to better manage its cash requirements as a result of such provisions.
KEY TAKEAWAYS
- A provision in a term loan that specifies when and how much the borrower receives is called a delayed draw term loan. This provision can be found in term loans.
- The DDTL will typically have predetermined time periods for the periodic payments, such as three, six, or twelve months; alternatively, the timing of the payments may be based on the accomplishment of company milestones.
- A lender is able to better manage cash requirements as a result of the provisions.
- The borrower is afforded the flexibility of knowing exactly when they will begin to receive guaranteed periodic cash flows thanks to the delayed draw.
The terms of the delayed installment payouts are based on milestones achieved by the company in some instances. For example, the company may be required to meet a certain sales growth requirement or meet a predetermined number of unit sales by a certain time. The expansion of profits and attainment of other financial goals may also be taken into account. For instance, in order for a company to qualify for the payouts from a delayed term loan, it must achieve or exceed a predetermined level of profits during each quarter of its fiscal year.
For the borrower, a delayed draw term loan provides a limit on how much it can draw on a loan. This limit can act as a governor to spend, which in turn reduces the borrower’s debt burden as well as the amount of interest that must be paid. At the same time, the delayed draw provides the borrower with the peace of mind that comes with knowing that they will be receiving a guaranteed amount of cash on a periodic basis.
Particular Concerns Regarding DDTL
In most cases, the delayed draw term loan provisions are included in institutional lending deals involving larger payouts than consumer loans, as well as greater complexity and maintenance requirements. These kinds of loans can have structures and terms that are particularly difficult to understand. They are offered to companies with high credit ratings the majority of the time, and the interest rates that come with them are typically more favorable for the borrower than the interest rates that come with other credit options.
Since 2017, however, DDTLs have seen increased use in the larger, broadly syndicated leveraged loan market in loans with a total value of several hundreds of millions of dollars. The leveraged loan market is well-known for its practice of making loans to companies and individuals who have a history of either high debt or poor credit.
There are a number of different organizational options available for delayed draw term loans. Either they are included as part of a single lending agreement between a financial institution and a business, or they are included as part of a syndicated loan deal. Either way, they are a form of business financing. There are numerous categories of contractual stipulations or demands that borrowers are expected to fulfill in every circumstance.
The use of delayed draw terms in loans is becoming increasingly common in larger, more broadly syndicated leveraged loans. Previously, these loan terms were offered by middle-market lenders through non-syndicated leveraged loans.
When underwriters are determining the terms of a delayed draw term loan, some of the considerations that they may take into account include the maintenance of cash levels, the growth of revenue, and earnings projections. When applying for a term loan, a company may be required to keep a certain amount of cash on hand or report a minimum quick ratio factor.
This is done so that the loan installments can be spread out over a number of different time periods. However, despite the fact that they prevent the borrower from engaging in certain activities—such as overleveraging—that involve liquidity, liquidity-focused factors are still regarded as a flexible feature of term loans.
