What Is a Delayed Draw Term Loan?
A delayed draw term loan is a committed credit facility that works like a term loan on a delay. The lender commits the full amount when the credit agreement is signed, but the borrower takes the money down later, often at any point within a 12 to 24 month availability period. Once drawn, the balance converts into a standard term loan on the same terms as the rest of the debt.
DDTLs sit between a revolver and a funded term loan. Unlike a revolver, amounts repaid generally cannot be reborrowed, and the facility is earmarked for specific uses spelled out in the agreement, most commonly acquisitions. Unlike a funded term loan, the borrower avoids paying full interest on cash it does not yet need, which keeps the deal economics cleaner.
How It Works
Until the loan is drawn, the borrower pays a ticking fee on the undrawn commitment, commonly starting around 1 percent annually or half the loan's credit spread, and often stepping up the longer the commitment sits unused. Drawing usually requires the borrower to satisfy conditions such as a pro forma leverage test, which protects lenders from funding into a deteriorating credit.
Consider a sponsor-backed software company pursuing a roll-up strategy. Its credit agreement might pair a 300 million dollar funded term loan with a 100 million dollar DDTL available for 18 months to finance add-on acquisitions. When a target is signed, the company draws the DDTL at the pre-agreed spread instead of negotiating new financing under time pressure.
Why It Matters
DDTLs solve a timing problem that matters greatly in M&A. Committed capital lets a buyer sign purchase agreements quickly and with financing certainty, which strengthens its position in competitive processes. That certainty has helped direct lenders win business from the broadly syndicated market, where each new financing must be marketed to investors deal by deal.
For analysts, DDTLs add modeling wrinkles. Interest expense must reflect the draw schedule rather than day-one funding, and ticking fees hit the income statement before any principal is outstanding. Leverage covenants are also tested on a pro forma basis at each draw. Private credit has made these facilities routine, so fluency with the mechanics is increasingly expected.
