Delayed Draw Term Loan

Delayed Draw Term Loan

What is a Delayed Draw Term Loan (DDTL)?

A Delayed Draw Term Loan (DDTL) is a committed loan facility that lets a borrower withdraw predefined amounts at scheduled times or after specified milestones from a pre-approved total commitment. It provides periodic access to capital while limiting the amount outstanding at any given time.

How it works

• Lender commits to a total facility size; the borrower draws portions according to the draw schedule or after meeting conditions.
• Draws can be timed (for example, quarterly) or contingent on milestones such as revenue, unit-sales targets, or earnings thresholds.
• The facility can be provided by a single lender or as part of a syndicated loan.

Example: A company has a $10 million DDTL and is entitled to draw $1 million each quarter, subject to any required covenants or milestone verifications.

Benefits

For borrowers:
* Aligns funding with actual needs (e.g., acquisitions or expansion), reducing idle cash and interest costs.
* Controls borrowing through capped, scheduled draws, helping manage leverage and spending.
* Often available on favorable terms to companies with strong credit profiles.

For lenders:
* Allows staged capital deployment, improving cash management and underwriting oversight.
* Enables inclusion of conditions and covenants that protect the lender before each disbursement.

Key structuring considerations

DDTLs are typically used in institutional and leveraged loan markets and can be complex. Common structuring elements include:
* Creditworthiness: lenders generally prefer borrowers with higher credit ratings.
* Covenants and triggers: requirements may include maintaining minimum cash balances, meeting earnings or revenue targets, or sustaining a minimum quick ratio.
* Liquidity protections: covenants often restrict actions that would materially weaken liquidity (for example, limits on additional leverage).
* Syndication: DDTLs are increasingly included in large syndicated leveraged loan transactions.

Since 2017, DDTLs have become more prevalent in large syndicated deals, particularly within the leveraged loan market.

Risks and suitability

• Best suited for businesses able to satisfy ongoing covenant and reporting requirements.
• Draws can be denied or delayed if contractual conditions are not met, which can affect planned projects.
• Complexity and conditionality make DDTLs less appropriate for smaller borrowers without robust financial controls.

Bottom line

A Delayed Draw Term Loan gives companies flexible, staged access to committed capital while enabling lenders to protect their exposure through draw conditions and covenants. When properly structured, DDTLs help align funding with operational milestones and minimize unnecessary interest and leverage—making them a practical choice for firms with strong credit and the capacity to meet ongoing contractual requirements.