Introduction
A delayed draw term loan (DDTL) is a unique feature in term loans, allowing a borrower to withdraw predefined amounts from a total pre-approved loan amount at predetermined intervals. These intervals could be every three, six, or nine months, all set in advance. This feature typically forms part of the borrower’s agreement and is often granted to businesses with strong credit standings. DDTLs are advantageous for businesses planning future acquisitions or expansions.
Grasping Delayed Draw Term Loans
A DDTL incorporates special provisions in the lending agreement’s borrowing terms. For example, upon originating the loan, the parties might agree that the borrower can withdraw $1 million every quarter from a $10 million loan. Such provisions enable lenders to manage their cash flows more efficiently.
Key Takeaways
- A delayed draw term loan spells out when and how much the borrower can withdraw.
- DDTLs generally have predefined time periods, such as three, six, or nine months for installments, although these periods may also be milestone-based.
- These provisions assist lenders in managing cash requirements effectively.
- Borrowers benefit from knowing when to expect guaranteed, periodic cash flows, enhancing financial planning and operational efficiency.
Performance-Based Drawdowns
In some situations, delayed installments hinge on milestones like sales growth or hitting a specific number of unit sales by a certain date. Earnings growth and other financial milestones may also play a role. For instance, a company might need to maintain a specified earnings level each quarter to receive loan drawdowns.
For borrowers, DDTLs limit withdrawal amounts, acting as a spending governor which can reduce debt burdens and minimize interest payments. Concurrently, the delayed draws provide assurance of regular cash influxes.
Delayed Draw Term Loan Considerations
Generally, delayed draw term loans are involved in institutional lending with larger payouts compared to consumer loans and come with greater complexity. These loans often have intricate structures and terms. They are typically extended to businesses with high credit ratings and generally offer more favorable interest rates than alternative credit options.
However, since 2017, DDTLs have also found increased usage in the broadly syndicated leveraged loan market, available in loan amounts worth several hundred millions. This market serves entities with high debt levels or poor credit histories.
Structuring Delayed Draw Term Loans
Delayed draw term loans can be configured in various ways. They can be a single agreement between a financial institution and a business or part of a syndicated loan. Different contractual caveats or requirements are set forth for borrowers.
Previously provided by middle-market lenders through non-syndicated leveraged loans, the term conditions of DDTLs have gained popularity in larger, broadly syndicated loans.
When structuring DDTL terms, underwriters may assess factors like maintaining cash levels, achieving revenue growth, and meeting earnings projections. Often, borrowers need to sustain a specific cash level or comply with a minimum quick ratio for loan distribution. Liquidity requirements might restrict actions like overleveraging but are seen as flexible features in term loans.
Conclusion
Delayed draw term loans offer a blend of flexibility and financial control, making them a valuable tool for businesses poised for growth. Understanding and effectively managing these loans can help both borrowers and lenders achieve their strategic financial goals.
Related Terms: Term Loan, Leveraged Loan, Syndicated Loan.
