All About Delayed Draw Term Loan

Jan 24, 2024 By Susan Kelly

The borrower of a delayed draw term loan (DDTL) can access a portion of the loan's total amount at certain intervals after approval. The frequency of withdrawals is also predetermined, for example, every three, six, or nine months. Lenders may extend DDTLs to borrowers with stellar credit ratings. When a company borrows money to use the funds for future purchases or expansion, a DDTL is a joint stipulation in the loan agreement.

A Guide to Delayed Draw Term Loans For a term loan with a delayed draw period, the standard borrowing rules in a loan agreement must be modified. As an illustration, a lender and borrower may decide from the get-go that the borrower can withdraw $1,000,000 from a $10,000,000 loan every three months. A lender can better control its cash flow with the help of such clauses.

Lenders can better manage their cash flow.

Lenders can better manage their cash flow with specific provisions in place. The borrower is provided with the convenience of knowing exactly when they will begin receiving regular, guaranteed cash flows thanks to the drawing delay.

A corporation may be required to accomplish specific sales growth requirements or sell a certain number of units by a particular date to receive the total amount of its deferred payment. Potential factors include the level of earnings and the achievement of any other significant financial goals. Example: to collect payments on a deferred term loan, a corporation must achieve or surpass a quarterly earnings target based on the company's fiscal year.

With a delayed draw term loan, the borrower is restricted in how much money they can access at once. This spending cap helps keep the borrower's debt and interest payments in check. The borrower has more leeway to adapt to changing circumstances because of the regularity of the delayed draw.

Special Cases Regarding DDTL

Delayed draw-term loan conditions are more common in sophisticated, high-payoff institutional lending transactions than in simple, low-payoff consumer loans. These loans often have complex arrangements and stipulations. They have higher borrower-friendly interest rates than most other forms of lending and are typically granted to enterprises with solid credit ratings.

However, the broader, globally syndicated leveraged loan market has been increasingly using DDTLs in loans of several hundred million dollars since 2017. Lending to people and businesses with significant debt loads or poor credit histories is a specialty of the leveraged loan industry.

There are various options for the construction of delayed draw term loans. A financial institution and a company may enter into a single lending agreement, or the loans may be bundled into a larger package known as a syndicated loan deal. Borrowers are subject to various stipulations and conditions outlined in their contracts.

Loan Conditions

Deferred draw term loan conditions offered only by middle-market lenders through non-syndicated leveraged loans are now frequently included in more extensive, widely syndicated leveraged loans.

The underwriters of a delayed draw term loan may consider the borrower's ability to keep cash on hand, the rate at which their business is growing in revenue, and their projected earnings when determining the loan's conditions.

Term loans have installments that are paid back over time. Therefore it's common for the lender to require that the borrower keep a minimum amount of cash on hand or report a minimum quick ratio factor. Borrowers are constrained from engaging in some activities, like overleveraging, by the liquidity considerations of a term loan, although this is still a very flexible feature.

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The borrower may make a second draw request for extra loan funds after the initial draw time has ended if the lender agrees to the borrower's request under the terms of the loan's negotiated term loan option, known as a delayed draw term loan (DDTL). There is a cap on the amount of money that can be borrowed during the draw period of a draw-term loan.

Term Loan with a Deferred Disbursement (DDTL) Deferred draw periods is draw periods that are extended and are typically made available to borrowers with excellent credit. This form of loan is distinct from those in which the entire sum is disbursed at once to the borrower.

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