A delayed draw term loan is committed term debt sized and documented at closing, with the borrower’s right to pull down tranches later for specified uses. Think of it as acquisition ammunition you buy on day one and load only when you need it. It is term risk with a ticking clock, not a revolving line you can repay and re-borrow.
Sponsors use delayed draw term loans to credit-check and price future add-ons up front, then move quickly when targets sign. In buy-and-build strategies, the tool funds acquisitions without re-underwriting the core facility or reopening intercreditor terms. The trade is simple: pay for access to capital you expect to use, keep lenders aligned on scope, and shrink the gap between signing and funding.
Market depth makes DDTLs practical
The market provides the canvas. Private credit assets under management reached roughly 1.7 trillion dollars as of June 2024, per Preqin. That depth supports committed acquisition facilities embedded at LBO close. Direct lenders report broad delayed draw term loan usage for 12 to 24 months post close, especially in mid market unitranche and first lien packages, where certainty and speed drive win rates in competitive auctions.
What a DDTL is and what it is not
A delayed draw term loan is not a revolver. You cannot re-borrow once repaid, and pricing reflects term risk. It is not an accordion either, which depends on baskets and market terms at the time of take up unless pre negotiated. In direct lending, the delayed draw term loan typically sits alongside the funded first lien term loan or unitranche and ahead of any holdco PIK or seller paper. That positioning keeps execution simple while preserving the senior deal economics.
Commitment is fixed at close, either as a percentage of the funded term loan or a dollar amount tied to a defined pipeline. Availability ends on a stated date, when fully used, or after an event of default, which preserves timing and certainty for both sides. Facilities often run 12 to 24 months to match expected acquisition cadence.
Conditions to draw keep discipline without killing speed
Draws usually require a narrow set of conditions that balance access with risk control. The most common include:
- Limited reps: Bring down of representations, often limited to fundamental and specified reps that matter for credit and compliance.
- No defaults: No default or event of default to maintain access protection.
- Leverage control: Pro forma compliance with maintenance covenants or meeting an incurrence leverage test so add-ons do not stretch the capital structure.
- Permitted scope: Proof that the target fits permitted acquisition criteria, such as size, geography, adjacency, and sanctions and anti-corruption compliance.
- Clear paperwork: Delivery of the acquisition agreement, sources and uses, and a pro forma certificate to streamline lender review.
Funds can pay purchase price, fees, and integration capex, but not dividends or unrelated investments unless lenders consent. After conditions are satisfied, lenders fund on short notice, commonly three to five business days. Many agreements set a minimum draw size to avoid administrative drag and preserve focus.
Legal form and collateral follow the senior deal
The delayed draw term loan is created as an additional term commitment under the main senior facilities or unitranche agreement. New York and English law dominate. Borrowers are the operating group and material subsidiaries guarantee. Security mirrors the funded term loan: share pledges, all asset liens, and local law security that can be implemented quickly as add-ons close.
Ring fencing comes from negative covenants, permitted acquisition definitions, and incremental and lien baskets that limit leakage. The delayed draw term loan usually shares collateral and payment priority with the funded term tranche unless expressly subordinated in a second lien or split collateral arrangement. Where a super senior RCF exists, the intercreditor agreement fixes priority and waterfall at close, which avoids renegotiation at draw time.
Cross border platforms add local collateral steps. English law deals rely on debentures, share pledges, and local mortgages. U.S. deals deliver Article 9 perfection, control agreements, and IP filings. Conditions list post closing deliverables and deadlines so timing remains predictable even as multiple jurisdictions come into play.
Cash flow priority and call protection
Payments follow the main term loan waterfall. Cash sweeps apply pro rata across funded tranches. Mandatory prepayments from asset sales and insurance can include reinvestment rights during the acquisition period. Soft call premiums or make wholes often apply for a period after each draw, which discourages fast take outs that would strand lenders on fees without term economics. Availability ends on a drop away date or earlier for change of control, significant asset sales, or stress covenants that require minimum liquidity.
How DDTLs compare to look-alike tools
- Accordion or incremental: Capacity based and priced later unless hard wired. Better for repricing flexibility and headline cost. Worse for closing certainty. Delayed draw term loans lock in price and process early.
- RCF sub limits: Allow re borrowings and price as liquidity lines, which fit working capital rather than acquisitions.
- Super senior RCF plus unitranche: The delayed draw term loan sits inside the unitranche and respects cash dominion. ABL first structures may limit usage against working capital assets.
Stakeholder incentives and common pressure points
Sponsors value certainty, speed, and flexibility on add-on size and timing. Lenders value fee income, governance over the acquisition perimeter, and pro forma leverage discipline. Management values repeatable closing mechanics and reliable integration funding. Tension shows up in EBITDA addbacks, synergy credit, and the right to cure after close. These are classic places to argue, best settled with hard caps and timelines so the draw path is clear.
Pricing, fees, and a sizing rule of thumb
Margin often matches the funded term loan or sits within a band, floating over SOFR or SONIA. Upfront fees or original issue discount may apply to the entire commitment at close or only to drawn amounts. Commitment fees accrue on the undrawn commitment at a lower rate, paid quarterly. Soft call premiums deter quick take outs and some deals add a make whole for a short window post draw. Commitment fee step downs can tie to utilization or time to expiry, which rewards disciplined sizing of the commitment.
Practical rule of thumb: size the delayed draw term loan at 1.0 to 1.5 times the signed plus near term letter-of-intent pipeline, then introduce step downs every 6 months. That pairing minimizes cold powder cost while preserving credible capacity for surprise opportunities.
Illustration of cost build up
Assume a platform with a 400 million dollar funded term loan and a 200 million dollar delayed draw term loan. Upfront fee of 2 percent applies at close on both. The delayed draw term loan charges a 0.75 percent per annum fee on undrawn commitments. The sponsor draws 120 million dollars six months post close and the remaining 80 million dollars four months later.
- Upfront fees: 12 million dollars on 600 million dollars at close, a known cost that locks in lender support.
- Commitment fees: Roughly 0.75 million dollars for six months on 200 million dollars, then about 0.5 million dollars for four months on 80 million dollars undrawn.
- Interest: Begins on each draw at SOFR plus 600 bps, so the timing of acquisitions directly affects the weighted average cost.
If nothing is drawn, the cost is the commitment fee plus any upfront on the delayed draw term loan, net of accounting effects. Size the commitment to likely use to protect returns. Sponsors who combine a delayed draw term loan with a narrow acquisition perimeter avoid paying for capacity they cannot use.
Accounting and reporting treatment
Under U.S. GAAP, borrowers treat upfront fees and original issue discount as debt discount under ASC 470. Commitment fees may be deferred and amortized over the availability period as loan commitment costs. Upon draw, the related amounts fold into the effective interest rate on the funded debt. Later increases in delayed draw term loan capacity trigger modification versus extinguishment tests under ASC 470 50.
Under IFRS, the delayed draw term loan becomes a financial liability when drawn under IFRS 9. Commitment fees are expensed over the commitment period unless the commitment itself is a liability measured at fair value. When drawn, fees are treated as transaction costs and amortized. IFRS 7 disclosures should cover liquidity risk and undrawn commitments so investors understand the future cash needs.
Lenders that are funds generally carry loans at fair value through profit or loss under ASC 946 and IFRS 9. They accrue fees on unfunded commitments where applicable and disclose them to investors. Banks often carry at amortized cost and recognize commitment fees over the availability period. All disclose unfunded commitments in statements and investor letters to address optics around capacity and fee income.
Tax and regulatory notes that change the math
Interest limits matter. U.S. 163(j), EU ATAD, and UK Corporate Interest Restriction can cap deductibility. Back ended draws against rising EBITDA may help, but synergy addbacks face tax caps. Cross border interest and original issue discount can trigger withholding absent treaty relief. Draft lender qualification covenants and transfer restrictions to control gross up exposure. If layered with shareholder debt, set arm’s length pricing and watch thin cap and hybrid rules. Upfront and ticking fees may be capitalized and amortized rather than expensed in some regimes, and prepayment premiums can face deductibility limits.
KYC and AML checks follow initial onboarding and extend to target sellers and acquired entities at each draw. Sanctions reps and beneficial ownership updates sit in the conditions precedent. The U.S. Corporate Transparency Act adds ongoing reporting for many companies starting in 2024, which can influence closing timelines. SEC rules for private fund advisers require quarterly investor statements and tighter fee disclosures, with Form PF changes adding current reporting for certain events. That pushes managers to track unfunded commitments and fee accruals closely. In the EU, AIFMD and national regimes treat unfunded commitments as leverage for disclosure and monitoring, which affects fund level reporting.
Risks and edge cases to anticipate
- Availability cliff: A covenant breach, late reporting, or a stress test trigger can freeze access mid pipeline. Maintain headroom and choose pro forma incurrence tests for draws where possible.
- Acquisition drift: If targets fall outside permitted business, consent slows or stops deals. Draft adjacency clearly and set practical size bands.
- Synergy overreach: Inflated addbacks undermine tests. Cap percentage and duration, and require validation for large credits.
- Undrawn cost: If M&A slows, commitment fees and upfront on unused capacity weigh on returns. Use step downs or milestone based tranches.
- Collateral slippage: Small or foreign targets may sit outside guarantees. Use materiality thresholds with backstop guarantees and plan local security early.
- Regulatory approvals: Healthcare, defense, and critical infrastructure add timing risk. Build conditions that allow for clearance timelines and escrow mechanics.
- Intercreditor friction: Super senior RCF cash dominion and blockings can complicate acquisition proceeds flow. Fix consent paths and waterfall effects up front.
Implementation timeline that keeps speed without surprises
Weeks 0 to 2 focus on term sheet and underwriting. Size the delayed draw term loan against a vetted pipeline, set expiry, and agree acquisition parameters. Run KYC and preliminary sanctions checks. Draft the permitted acquisition perimeter and synergy policy. Weeks 2 to 6 lock down documentation. Negotiate mechanics, conditions, and reporting. Finalize intercreditor terms if an RCF is present and build guarantee and collateral schedules with post closing items and deadlines.
Weeks 6 to 8 close the facility. Deliver corporate approvals for future draws, specimen notices, solvency certificates, and KYC. Provide a base model and integration plan. Set up cash management and control agreements. Post close to expiry is execution. For each add-on, deliver a short draw package: acquisition agreement, target financials, pro forma certificate, sanctions confirmations, and a lien perfection plan. Lenders respond within agreed timelines. Update collateral and guarantees per jurisdiction post close. For sponsors that rely heavily on add-on acquisitions, building a repeatable package saves days on every closing.
Negotiation focal points that move outcomes
- Availability and step downs: Tie to sourcing milestones and cancel unused portions at interim dates to control cost and enforce discipline.
- Simplified conditions: Pre clear small deals with SunGard lite conditionality, draw thresholds, and evidence lists to keep speed.
- Synergy policy: Cap percentage and time horizon and require third party validation above size bands to preserve credibility.
- Integration leakage: Set small baskets for severance and systems spend without extra approvals so teams can execute.
- MFN protection: Carve the committed delayed draw term loan from most favored nation where possible to avoid unintended margin step ups.
- Tax gross ups: Narrow increased cost and gross up provisions and require lender cooperation on treaty forms for predictability.
- Call protection: Balance lender economics with sponsor flexibility on take outs using tenor based soft calls and short make whole periods. For background on prepayment math, see this overview of call protection and OID.
Quick checklist for deal teams
- Right size: Size to verified pipeline and expected EBITDA contribution, not headline total addressable market.
- Window design: Set a realistic availability window with step downs and cancellation triggers.
- Fee alignment: Match pricing and fees to likely utilization. Avoid paying for cold powder.
- Clear perimeter: Draft acquisition parameters with adjacency and geography spelled out and pre clear recurring target types.
- Fast CPs: Negotiate streamlined conditions and a consent service level agreement with deemed consent for small deals.
- Guardrails: Cap synergy addbacks and time limit realization and add audit rights for large credits.
- Stack fit: Confirm intercreditor alignment and RCF consent for acquisition closings and cash flows.
- Collateral map: Map collateral and guarantees for cross border add-ons. Use materiality thresholds and backstops.
- Accounting and tax: Plan for fees, original issue discount, and premiums. Prevent nondeductible surprises.
- Pipeline hygiene: Maintain a monthly pipeline summary and keep post closing collateral items current to protect availability.
Closing thoughts
A delayed draw term loan turns intent into capacity. You do the harder work up front, including pricing, governance, and scope, and you buy speed and closing certainty on the back end. The costs are visible, from upfront and ticking fees to the discipline of a perimeter you agreed to. The risks are known, including availability triggers, collateral dilution, and optimistic addbacks. When matched to a credible pipeline and run with tight execution, a delayed draw term loan protects timelines and preserves the core financing, which is the scarce asset in any cycle.
Related reading on the capital stack: second lien loans, mezzanine debt, and preferred equity.