Introduction

Shields Legal represents lenders and borrowers in transactions where companies seek to expand their businesses or acquire related entities. The roll-up strategy continues to be an increasingly popular business model.

A roll-up strategy is a focused acquisition strategy that involves acquiring multiple smaller companies within the same industry and consolidating them into a larger, more competitive enterprise for efficiencies of scale and operations.

In today’s competitive market, companies require greater flexibility and access to capital as they pursue acquisition opportunities and scale operations. Delayed Draw Term Loan (DDTL) has gained significant traction in supporting these transactions, which allows borrowers to access committed capital over time as acquisition and growth opportunities arise. DDTLs are particularly well-suited to support roll-up strategies.

A DDTL is a financing structure that allows a borrower to access additional, pre-defined amounts of capital after the closing of an initial financing transaction, either at scheduled intervals or on an as-needed basis. The lender provides a maximum committed loan amount that the borrower may draw over a specified availability period.

For example, a DDTL may allow a borrower to draw each quarter from an aggregate total commitment. Alternatively, the draw schedule may be tied to project-based milestones, such as permitting draws if certain sales-growth targets are met by a specified date. The structure may also permit multiple draws for separate transactions, such as for various acquisitions or initiatives during the availability period.

Importantly, borrowers pay interest only on the loan amount actually drawn, and the amount drawn must be repaid by the loan’s maturity date. These features make DDTLs a practical financing option for large-scale or ongoing acquisition projects.

Overall, DDTLs provide borrowers with flexible access to capital without renegotiating financing or pursuing additional financing for each new opportunity.

Key Considerations in Efficiently Structuring a Delayed Draw Loan

When structuring a DDTL, it is essential for borrowers and lenders to focus on clarity, compliance, and flexibility to ensure that financing is both efficient and practical.

1. Clearly Define the Purpose and Draw Schedule

Clearly defining the purpose of the loan and the anticipated draw schedule is essential. Clear expectations optimize capital usage, help ensure compliance with existing financial covenants, and help manage financing fees and costs. By outlining how and when funds will be used, both parties gain greater transparency and predictability over the timing and funding of capital.

2. Drawdown Conditions and Upfront Negotiations

Lenders typically require borrowers to satisfy specific draw conditions before funds can be accessed. These conditions are often negotiated upfront, and addressing these conditions allows both parties to establish clear financing terms for future draws, reducing  uncertainty and aligning expectations regarding the timing and use of loan proceeds.

Borrower-friendly structures condition each draw on the borrower meeting certain predetermined business milestones or pro forma compliance with financial covenants  providing greater certainty that funds will be available once those milestones are achieved.

Lender-friendly structures, by contrast, allow the lender to retain sole discretion over each draw, even if conditions are met, giving the lender broader control over whether and when funds are actually released.

3. Permitted Acquisitions under Loan Documents

Because DDTLs are often used to finance future acquisitions, loan documents often include a defined list of criteria that potential acquisitions must satisfy. During negotiations, a lender may agree to a full delayed-draw commitment that becomes available so long as the borrower operates within those parameters. Once the borrower satisfies the agreed-upon conditions for a qualifying acquisition, the lender is typically obligated to fund the draw.

Alternatively, a DDTL may be structured so that each draw remains subject to the lender’s subsequent approval, even when the acquisition meets the permitted-acquisition criteria. In that scenario, even if the borrower’s acquisition is permitted, the lender retains sole discretion over whether to disburse funds, significantly reducing the borrower’s certainty of execution. Borrowers should be aware of this distinction, as it can materially affect the predictability and timing of capital availability for future acquisitions.

4. Fees Associated with DDTLs  

There are several fees associated with DDTLs, and determining whether a DDTL is the appropriate financing option often depends on the amount and timing of those fees. Because these economic terms are typically negotiable, borrowers should carefully evaluate them in light of their anticipated capital needs and draw schedule. Common fees include:

• Upfront fees / Origination fee: An upfront fee to a lender for funding or arranging the DDTL. This is generally payable at closing. Alternatively, the fee may be payable at funding.
• Unused fee / Unfunded fee / Commitment fee: A fee charged on the committed but undrawn portion of the delayed draw commitment. It compensates the lender for reserving the funds for future withdrawals and encourages timely utilization of the facility. The fee is payable only on the portion of the committed amount that remains undrawn.

5. Co-Borrower vs. Guarantor Structure

Another consideration in a DDTL is the treatment of additional parties within the financing structure or “credit box.” Categorizing an additional party as a co-borrower or guarantor in future draw is a critical consideration whenever a new party may be added to a financing structure. Ultimately, the legal, financial, and operational consequences make them fundamentally different.

For example, when a borrower acquires a new business under a newly formed entity, the loan agreement will generally determine how this new entity must be treated, whether as a co-borrower required to assume direct liability or as a guarantor providing secondary credit support. These classifications affect liability allocation, covenant compliance, collateral requirements, and ongoing reporting obligations. For that reason, they should be carefully evaluated and negotiated at the outset of the transaction.

Conclusion

DDTLs provide borrowers with flexible capital access needed to execute roll-up strategies and add-on acquisitions and offer borrowers and lenders a structured framework for managing committed capital. The success of a DDTL hinges on careful upfront negotiation of key terms, including drawdown conditions, acquisition criteria, fees, and lender discretion, thereby balancing flexibility with certainty.

Shields Legal advises both lenders and borrowers in structuring DDTL financings that align with their business objectives. Contact us to discuss how we can help you navigate your next delayed draw transaction.