Delayed-Draw Term Loan: a Worked Example

The need is certainty. A business that signs a building contract, orders machinery with staged payments or agrees terms with an acquisition target is committing to pay money it does not have. If its funding depends on the bank agreeing again at each stage, a weaker quarter, a change in the bank's appetite for the sector or a tighter market can leave the project half paid for. A delayed-draw facility moves that risk to the lender at the outset, which is why it costs something even before it is used.

For the lender, the commitment is real exposure from the day it is signed. It must be able to fund on any drawing date in the availability period, and bank regulation counts the undrawn amount. The Basel standardised approach converts an undrawn commitment to an exposure at 40% of its amount. National rules vary: Australia's standard uses the same 40%, while the UK, until its Basel 3.1 rules start on 1 January 2027, converts a commitment of more than a year at 50%. Under the Basel liquidity coverage ratio, which UK banks and Australia's larger banks apply, a bank assumes that 10% of undrawn committed credit facilities to non-financial companies is drawn in a 30-day stress; New Zealand's banks run the Reserve Bank's own liquidity ratios instead.

The facility agreement sets the total commitment and an availability period, the window in which the borrower may draw. It usually sets a minimum amount and a maximum number of drawings, and often ties each one to a purpose and evidence, such as a certified progress claim or a supplier's invoice. Each drawing has its own conditions: typically that no default is continuing and the representations are still true, and sometimes a leverage test on the figures after the drawing.

A drawn amount becomes plain term debt. It repays on the agreed schedule and, unlike a revolving facility, cannot be drawn again once repaid. Any commitment still unused when the window shuts falls away.

The fee goes by several names, ticking fee, commitment fee or delayed-draw fee, and its shape varies. Some agreements charge it from signing; others start it after a period and step it up, for instance from half the margin to the full margin, so that a slow drawdown costs more. The rate is a commercial term, set deal by deal.

A cold-storage operator, constructed for this page, is building three warehouses over eighteen months. Its lenders commit a US$36m delayed-draw term loan with an eighteen-month availability period and a ticking fee of 1.2% a year on the undrawn amount. It draws US$12m at month 4, US$12m at month 10 and US$8m at month 16, leaving US$4m unused when the window closes. The rate, the drawings and the figures below are all the example's.

The delayed draw costs about two-fifths of borrowing everything at once, on the example's rates. It also leaves the operator with US$4m that is simply cancelled at month 18, where a day-one loan would have left it with US$4m of debt to repay or put to use. The fee on that last US$4m was the price of the option to draw it.

The lender's side of the same file: at signing, the full US$36m counts against its limits for the borrower, and under the Basel standardised approach the undrawn US$36m becomes an exposure of US$14.4m before risk weighting. That falls as drawings convert the commitment into loans.

A revolving credit facility is also committed and also charges a fee on undrawn money, but it can be drawn, repaid and drawn again for its whole life; it funds working capital that rises and falls. A delayed-draw term loan funds something that is paid for once and then repaid over years, so each drawing is one-way.

An accordion is a different kind of promise: it lets the borrower ask for more, but no lender is bound to provide it until it agrees at the time. A delayed draw is committed money; an accordion is permission to seek it. A property development loan, drawn against certified progress, works on a similar staged principle, with the drawing conditions built round the construction contract.

DEFINED IN ONE PARAGRAPH → · PRODUCT FILE: TERM LOAN → · DRAWING A DEVELOPMENT LOAN →

The commitment is approved on the business as it is when signed, and drawn on the business as it is months later. The conditions to each drawing are where those two meet. A drawing test tied to leverage protects the lender if the business weakens during the build, and is also the clause most likely to stop funding exactly when a half-built project needs it. A borrower reads it against its downside case; a lender reads it against what happens to the half-built warehouse if the test fails.

Sizing and timing are the other judgments. An availability period shorter than the build leaves the last stage unfunded; one far longer charges the borrower for months it will not use. Repayment that starts before the asset is earning strains cover in the early years. The credit paper sets out the project timetable beside the drawing schedule so a committee can see the two agree. The same structure finances equipment at far larger scale: The Wire follows four GPU-backed delayed-draw loans, each drawn as servers were bought and installed.

THE COMMITMENT FEE → · THE WIRE · FOUR REAL DELAYED DRAWS →