What is a deferred drawdown term loan?
A deferred draw term loan (DDTL) is a special feature of a term loan which stipulates that the borrower can withdraw predefined amounts from the total pre-approved amount of a term loan at contractual times. This feature is included as a provision in the borrower’s agreement. Lenders can offer this feature to borrowers with high credit quality. Often, a term loan is included in contractual loan agreements for companies that use the loan proceeds as financing for future acquisitions or expansion.
How a Deferred Draw Term Loan Works
A drawdown term loan requires that special provisions be added to the borrowing conditions of a loan agreement. For example, at the origin of the loan, the lender and the borrower can agree on the conditions under which the borrower can take out $ 1 million each quarter on a loan valued at a total of $ 10 million. These provisions allow a lender to better manage its cash requirements. For the borrower, a term loan has a limit on the amount he can draw on a loan, which can act as a spending regulator, thereby reducing the debt burden and interest payments. . At the same time, the deferred drawdown gives the borrower the flexibility to know that he will benefit from a periodic and guaranteed cash injection.
Deferred drawdown term loans have traditionally been viewed in the mid-market as part of non-syndicated leveraged loans. Since 2020, however, DDTLs have seen increased use in the broader, broadly syndicated leveraged loan market for loans worth hundreds of millions of dollars.
Provisions relating to deferred term loans
As a general rule, the provisions relating to deferred drawdown term loans are included in institutional loan agreements involving larger payments than consumer loans, with greater complexity and maintenance. These types of loans can have complex structures and conditions. They are most often offered to companies with high credit scores. They usually have lower interest rates for the borrower than other credit options.
Once supplied by middle market lenders via non-syndicated leveraged loans, the terms of deferred term loans have become popular in larger and largely syndicated leveraged loans.
Deferred Term Loan Requirements
Deferred term loans can be structured in several ways. They can be part of a single loan agreement between a financial institution and a business or they can be included as part of a syndicated loan. In any situation, the borrower must comply with different types of contractual warnings.
When structuring the terms of a term loan, the underwriters may take into account factors such as maintaining cash levels, income growth and profit projections. Often, a business may be required to maintain a certain level of liquidity or to declare a minimum rapid ratio factor for term loan payments to be spread over different periods. Liquidity-oriented factors prevent the borrower from performing certain specific acts, such as over-indebtedness, but they are still considered a flexible feature for a term loan.
In some cases, the terms of the installments can be based on milestones achieved by the company. These factors may imply a demand for sales growth such as the satisfaction of a specified number of unit sales at a given time. Other financial milestones can also be considered, such as profit growth. For example, a business may be required to reach or exceed a certain level of income in each quarter of its fiscal period in order to receive payments from a deferred term loan.