Deferred draw term loans are increasingly popular in the larger syndicated loan market, which is famous for providing capital to borrowers with high debt to income ratios and poor credit ratings. These loans are incremental, long-term capital loans that have commitment and ticking fees, but are still associated with lower interest rates than other forms of credit. If you are considering applying for a DDTL.
DDTLs are long-term capital loans
The increasing use of DDTLs by banks has prompted many to reassess their lending policies. While DDTLs can be a valuable tool in financing a business expansion, they are not without risks. The risk of default can be high, and lenders are taking extra steps to ensure their clients’ financial stability. Some borrowers have experienced this already. It’s important to know how to prepare for this potential problem, so that you can plan for a successful DDTL transaction.
A DDTL is a type of loan that is used to fund a specific transaction, typically within a few months after a platform deal. This type of loan offers flexibility but also comes with fees. The borrower must pay various fees to committed lenders during the period the facility is available, during its draw and until the loan matures. This article will examine some of the most common DDTL structures, as well as discuss the unique tax questions associated with them.
They are incremental loans
Delay in drawing a loan is a common feature of delayed draw term loans. These loans allow borrowers to request money as they need it, and pay less interest on the loan. The borrowers also avoid paying interest on large lump sums of cash. Delay in drawing a loan allows the borrower more flexibility in how to use the funds. They are best for borrowers with good credit ratings. Despite the delay, these loans are often complicated.
Delay-draw term loans were once only available to small businesses and the middle market. Lenders arranged them for borrowers who needed large loan capacity but did not want to immediately incur debt or interest. But their increasing popularity has made them a popular option for the large syndicated loan market. They have more flexible terms and lower interest rates, and lenders are more willing to offer them to companies with strong credit.
They have commitment fees
Delayd draw term loans are a growing part of the leveraged loan market, which lends to borrowers with poor credit and high debt. The lenders who provide these loans charge a commitment fee, which is paid at the time of loan closing. Once available only from middle-market lenders, they have become increasingly popular in the syndicated loan market. The caveats of these loans vary depending on the lender and the type of loan.
DDTLs typically have a longer draw period and a final maturity matching the term loan tranche. However, delayed draw term loans carry commitment fees, which are based on the amount of unused facilities. Typically, these fees start at 1% and increase to 50 basis points for outstanding commitments. Drawn DDTL costs are similar to those of term loans, but they do not include revolving credits.
They have ticking fees
Delayd draw term loans come with a ticking fee. The borrower pays this fee on undrawn loan balances until they are used. The ticking fee is a financing fee that is charged by a lender to compensate for the commitment it made to the borrower to lend the funds. Since the money cannot be withdrawn until the loan is repaid, it is a cost of acquiring the loan.
Delayded draw term loans were previously only available in the middle market and were primarily provided for leveraged loan deals to companies with less than stellar credit and excessive debt. These loans are usually very large amounts – over $100 million – and have interest only periods that allow the borrower to accumulate a substantial amount of debt without attracting immediate interest. The lenders will also charge a commitment fee to the borrower, which is often a combination of an upfront fee and a ticking fee.
They are tax fungible
A tax fungible delayed draw term loan can have different tax characteristics than a normal term loan. For example, a delayed draw term loan with an incremental interest rate may be treated as fungible if it is arranged as a second term loan, and the borrower will not have to pay any additional upfront fees. A tax fungible delayed draw term loan has a definite tax advantage, as it reduces the interest rate the borrower has to pay.
Debt instruments can be made Tax Fungible if they are commercially fungible, which is required by the new rules. However, these instruments must have different CUSIP numbers to avoid being treated as one debt instrument. This distinction is crucial to tax reporting purposes, because debt instruments with the same CUSIP number cannot be treated separately. Tax fungible delayed draw term loans are also often the same as non-taxable debt instruments, and are a good option for businesses that need liquidity to pay their bills.
They are more complex than consumer loans
A delayed draw term loan allows borrowers to request additional amounts after an initial draw period. Large companies and businesses often use this type of loan because it allows them to make multiple withdrawals from a predetermined loan amount. The lender also has the opportunity to better manage their cash needs by having the borrower withdraw funds every quarter or every year. This type of loan requires special provisions in the lending agreement, which is why the borrower should understand the terms of this type of loan before applying for one.
