What Is a Delayed Draw Term Loan?
A delayed draw term loan (DDTL) is a special feature in a term loan that lets a borrower withdraw predefined amounts of a total pre-approved loan amount. The withdrawal periods—such as every three, six, or nine months—are also determined in advance. A DDTL is included as a provision of the borrower's agreement, which lenders may offer to businesses with high credit standings. A DDTL is often included in contractual loan deals for businesses who use the loan proceeds as financing for future acquisitions or expansion.
Understanding Delayed Draw Term Loans
A delayed draw term loan requires that special provisions be added to the borrowing terms of a lending agreement. For example, at the origination of the loan, the lender and borrower may agree to the terms that the borrower may take out $1 million every quarter out of a loan valued at a total of $10 million. Such provisions allow a lender to manage its cash requirements better.
- A delayed draw term loan is a provision in a term loan that specifies when and how much the borrower receives.
- The DDTL typically has specific time periods, such as three, six, or time months, for the periodic payments, or the timing of the payments can be based on company milestones.
- The provisions allow a lender to better manage cash requirements.
- The delayed draw gives the borrower the flexibility of knowing when they will see guaranteed, periodic cash flows.
In some cases, the terms of the delayed installment payouts are based on milestones achieved by the company, such as sales growth requirement or meeting a specified number of unit sales by a specific time. Earnings growth and other financial milestones might also be considered. For example, a company is required to meet or exceed a certain level of earnings in each quarter of its fiscal year in order to receive the payouts from a delayed term loan.
For the borrower, a delayed draw term loan offers a limit on how much it can draw on a loan, which can act as a governor to spending, thereby reducing its debt burden and interest payments. At the same time, the delayed draw gives the borrower the flexibility of knowing that it will have a guaranteed periodic cash infusion.
DDTL Special Considerations
Generally, delayed draw term loan provisions are included in institutional lending deals involving more substantial payouts than consumer loans, with greater complexity and maintenance. These types of loans can have complicated structures and terms. They are most commonly offered to businesses with high credit ratings, and usually come with more favorable interest rates for the borrower than other credit options.
Since 2017, however, DDTLs have seen increased use in the larger, broadly syndicated leveraged loan market in loans worth several hundred millions of dollars. The leveraged loan market is known for lending to individuals and companies with high debt or poor credit histories.
Delayed draw term loans can be structured in a number of ways. They may be part of a single lending agreement between a financial institution and a business or they may be included as part of a syndicated loan deal. In any situation, there are different types of contractual caveats or requirements borrowers must meet.
Once provided by middle-market lenders via non-syndicated leveraged loans, delayed draw term loan terms have become popular in larger, broadly syndicated leveraged loans.
When structuring the terms of a delayed draw term loan, underwriters may consider such factors as maintenance of cash levels, revenue growth, and earnings projections. Often a business may be required to maintain a certain level of cash on hand or report a minimum quick ratio factor for term loan installments to be dispersed over various time periods. Liquidity-focused factors limit the borrower from performing some particular acts, such as overleveraging, but they are still considered a flexible feature for a term loan.