Delayed Draw Term Loan

What Is a Delayed Draw Term Loan?

A delayed draw term loan (DDTL) is a special feature in a term loan that allows a borrower to withdraw predefined amounts of a total pre-endorsed loan amount. The withdrawal periods — like each three, six, or nine months — are additionally determined in advance. A DDTL is incorporated as a provision of the borrower's agreement, which lenders might offer to businesses with high credit standings. A DDTL is many times remembered for contractual loan deals for businesses who utilize the loan proceeds as financing for future acquisitions or expansion.

Understanding Delayed Draw Term Loans

A delayed draw term loan expects that special provisions be added to the borrowing terms of a lending agreement. For instance, at the origination of the loan, the lender and borrower might consent to the terms that the borrower might take out $1 million each quarter out of a loan valued at a total of $10 million. Such provisions permit a lender to deal with its cash requirements better.

Sometimes, the terms of the delayed installment payouts depend on milestones accomplished by the company, like sales growth requirement or meeting a predefined number of unit sales by a specific time. Earnings growth and other financial milestones could likewise be thought of. For instance, a company is required to meet or surpass a certain level of earnings in each quarter of its fiscal year to receive the payouts from a delayed term loan.

For the borrower, a delayed draw term loan offers a limit on the amount it can draw on a loan, which can act as a lead representative to spending, in this way decreasing its debt burden and interest payments. Simultaneously, the delayed draw provides the borrower with the flexibility of realizing that it will have a guaranteed periodic cash imbuement.

DDTL Special Considerations

By and large, delayed draw term loan provisions are remembered for institutional lending deals including more substantial payouts than consumer loans, with greater complexity and maintenance. These types of loans can have convoluted designs and terms. They are generally normally offered to businesses with high credit ratings, and ordinarily accompany more good interest rates for the borrower than other credit options.

Starting around 2017, be that as it may, DDTLs have seen increased use in the bigger, comprehensively syndicated leveraged loan market in loans worth several hundred large number of dollars. The leveraged loan market is known for lending to people and companies with high debt or poor credit accounts.

Delayed draw term loans can be structured in a number of ways. They might be part of a single lending agreement between a financial institution and a business or they might be incorporated as part of a syndicated loan deal. In any situation, there are various types of contractual caveats or requirements borrowers must meet.

When given by center market lenders by means of non-syndicated leveraged loans, delayed draw term loan terms have become well known in bigger, extensively syndicated leveraged loans.

While organizing the terms of a delayed draw term loan, underwriters might consider such factors as maintenance of cash levels, revenue growth, and earnings projections. Frequently a business might be required to keep a certain level of cash close by or report a base quick ratio factor for term loan installments to be scattered throughout different time spans. Liquidity-centered factors limit the borrower from playing out a few particular acts, for example, overleveraging, yet they are as yet viewed as a flexible feature for a term loan.

Highlights

• The provisions permit a lender to better oversee cash requirements.
• The DDTL regularly has specific time spans, like three, six, or time months, for the periodic payments, or the timing of the payments can be founded on company milestones.
• The delayed draw provides the borrower with the flexibility of knowing when they will see guaranteed, periodic cash flows.
• A delayed draw term loan is a provision in a term loan that determines when and how much the borrower receives.