Delayed Draw Term Loan (DDTL)
Definition
A Delayed Draw Term Loan is a committed term loan facility that allows borrowers to draw funds over a specified period (typically 12-24 months post-closing) rather than taking the entire loan at closing. Once drawn, DDTL tranches convert to regular term loans with standard amortization schedules and pricing. DDTLs are commonly used for: (1) staged acquisition payments and earnouts, (2) capital expenditure programs with uncertain timing, (3) working capital needs following LBOs, and (4) growth investments where deployment timing is flexible. Borrowers pay commitment fees (0.50-1.00% annually) on undrawn amounts but avoid full interest expense until funds deployed.
Why it matters
DDTLs solve the timing mismatch between deal closing and cash needs. Private equity acquires a company planning $50M bolt-on acquisitions over 18 months but doesn't know exact timing. DDTL provides committed $50M that can be drawn as acquisitions close—avoiding need to borrow full $50M upfront (paying unnecessary interest) while ensuring capital available when opportunities arise. During 2020-2022 boom, DDTLs became standard in LBO financings—sponsors wanted flexibility for acquisitions but lenders demanded commitment fees for tying up capital. However, DDTLs create 'debt overhang'—undrawn commitments count as debt for covenant tests (often at 50% weighting) limiting borrower flexibility. Borrowers must balance commitment fees versus interest savings versus covenant capacity consumption.
Common misconceptions
- •DDTL isn't a revolver—once drawn, it becomes permanent term debt that can't be repaid and redrawn. Fundamentally different from revolving credit flexibility.
- •Undrawn DDTL isn't 'free'—commitment fees add up. $50M undrawn for 18 months at 0.75% = $562K fees. May exceed savings from delayed interest depending on use timing.
- •DDTL expiration is hard deadline—missing draw window means losing capacity forever. No extensions without full lender consent and potential repricing.
Technical details
Draw mechanics and conditions precedent
Draw notice requirements: Borrower submits draw request typically 3-5 business days before desired funding. Notice specifies amount (often minimum $5-10M), use of proceeds, and compliance certifications. Lenders fund via wire on specified date—no negotiation or additional underwriting required if conditions satisfied.
Conditions precedent for draws: Standard conditions include: (1) No default or event of default existing, (2) Representations and warranties true and correct as of draw date, (3) Specified use of proceeds (acquisitions, capex, working capital as defined), (4) Delivery of officer's certificate and legal opinions, (5) Minimum liquidity or EBITDA thresholds if specified. One failed condition blocks entire draw.
Material adverse change considerations: Most DDTLs exclude MAC clauses allowing lenders to refuse draws—borrowers demand certainty that committed funds will be available. Exception: borrower bankruptcy or insolvency automatically terminates commitments. Some DDTLs include 'mini-MAC' for fraud or material misrepresentation discovery.
Pro rata draw requirements: If DDTL syndicated, all lenders must fund their pro rata share of each draw. Individual lender cannot refuse participation. Creates coordination complexity in syndicated deals—if one lender fails to fund, others must decide whether to cover (increasing their exposure) or let borrower face shortfall.
Conversion to term loan and amortization
Automatic conversion: Upon draw, DDTL tranche immediately becomes term loan with same pricing, covenants, and maturity as initial term loan. Example: Initial $100M term loan at L+400, 1% amortization, 7-year maturity. $30M DDTL drawn in month 12. Converted $30M has L+400, 1% amortization, matures in year 7 alongside initial loan. No repricing or separate tranching.
Amortization timing: Converted DDTL typically matches initial term loan amortization schedule from draw date forward. Alternative: Some deals 'back-load' amortization starting from original closing date, meaning DDTL has lighter amortization burden. Example: If year 1 draws pay year 1 amortization rather than catching up, borrower benefits from delayed principal payments.
Original issue discount (OID): DDTLs often carry lower OID than initial term loan (1-2% vs 3-4%) since lenders already earned commitment fees. However, if DDTL drawn late in availability period, lenders may demand 'make-whole' OID to compensate for delayed deployment. Negotiated at closing in credit agreement.
Prepayment treatment: Converted DDTL subject to same prepayment provisions as term loan—mandatory prepayments from excess cash flow, asset sales, debt issuance. Voluntary prepayments permitted with potential call protection. No separate treatment once converted—fully fungible with initial term loan.
Commitment fees and economics
Fee calculation: Commitment fee = Undrawn Amount × Fee Rate × Days Outstanding / 360. Example: $50M DDTL, 0.75% annual fee, drawn in tranches: Months 1-6: $50M undrawn = $187.5K fees, Month 7: $30M drawn, Month 7-12: $20M undrawn = $75K fees. Total fees $262.5K on $50M capacity.
Lender economics: Commitment fees compensate lenders for: (1) Balance sheet capacity reservation (can't deploy capital elsewhere), (2) Credit risk of adverse selection (borrowers draw more when credit deteriorates), (3) Operational costs of maintaining undrawn commitments. Need 0.50-0.75% to justify opportunity cost of committed capital.
Borrower decision framework: Compare cost of commitment fees vs cost of full interest if borrowed upfront. $50M DDTL at 0.75% fee vs term loan at L+400 (assume 6% all-in). Commitment fees = $375K annually. Full interest = $3M annually. Borrower saves ~$2.6M annually on undrawn portion—compelling if draw timing uncertain. Breakeven if borrower certain to draw within 3-4 months.
Syndication considerations: Lead arrangers earn upfront fees on DDTL commitments (1-2% of commitment). Syndicate participants earn commitment fees plus interest once drawn. Popular with lenders since fees improve returns on capital and drawn loans look like regular term debt. Less popular in tight markets when lenders prefer immediate deployment.
Common use cases and structuring
Bolt-on acquisition financing: PE firm buys platform company for $200M (funded with initial term loan). Plans $75M of acquisitions over 24 months but target companies not identified. Includes $75M DDTL to fund acquisitions as sourced. Avoids borrowing $75M upfront (paying 6% interest on idle cash) while ensuring capital available when opportunities arise. Critical for serial acquirers.
Capex and growth investments: Manufacturer acquires competitor planning $40M facility expansion over 18 months as engineering completes and permits obtained. DDTL provides committed financing without overfunding balance sheet. Alternative would be drawing full $40M upfront and investing in cash equivalents at 2-3%—net cost 3-4% on dead cash. DDTL commitment fee ~1% more attractive.
Earnout and contingent payments: Deal includes $30M earnout payable in years 2-3 if targets met. DDTL provides committed financing if earnout triggered. If targets not met, borrower avoids paying interest on unused capacity (only pays commitment fee). Particularly valuable when earnout likelihood uncertain at closing—provides optionality.
Sponsor equity timing: Some LBOs structure DDTL as 'last dollar in' facility requiring sponsor equity contribution before DDTL draws. Ensures sponsor doesn't over-lever company—must demonstrate business performing before accessing additional debt. Common in stretch financings where lenders want sponsor accountability before full facility utilization.