Delayed draw term loan (in a private credit fund context)

A delayed draw term loan (DDTL) is a structured lending commitment in which the lender agrees to make funds available to the borrower in instalments over a defined future period, rather than advancing the full loan amount at closing. The borrower can draw on the committed capital as needed, up to the total commitment, and pays a commitment fee on the undrawn amount during the availability window.

In a private credit fund context, DDTLs are significant because they create a forward commitment that affects the fund's capital call timing, capital deployment pace, and liquidity management in ways that differ materially from fully funded term loans.

How it works

At closing, the lender (the private credit fund) commits to advance up to a defined total amount to the borrower, but advances only a portion immediately. The remaining committed amount sits as an unfunded commitment: the fund has a legal obligation to lend but has not yet transferred the cash. The borrower can draw on this unfunded commitment at defined intervals or upon defined triggers, such as the completion of an acquisition or the achievement of a revenue milestone, subject to conditions precedent specified in the credit agreement.

During the availability period (the window during which draws can be requested, which might run from 6 to 36 months depending on the facility), the borrower pays a commitment fee, typically expressed as a percentage of the undrawn commitment. This compensates the fund for reserving the capital and for the administrative burden of maintaining the commitment. The commitment fee is cash income to the fund from the date of closing, regardless of whether the borrower draws.

From the fund administrator's perspective, DDTLs create a forward funding obligation that must be tracked and provisioned for. The unfunded commitment represents a potential future capital call on the fund's LPs: when a borrower draws on the DDTL, the fund needs cash to fund the advance, which may require a capital call (if the fund does not hold sufficient cash) or a draw on its subscription credit facility.

The interaction between DDTLs and the fund's subscription line is operationally significant. Some fund administrators use the subscription line to bridge DDTL draws before issuing a capital call to LPs. This is efficient when draws are small or closely spaced, but can create concentration risk if a large DDTL draw coincides with draws from other borrowers or with the expiry of the subscription line's availability.

DDTLs also affect portfolio company reporting: the funded portion and the unfunded commitment must be tracked separately, with the funded portion reported at carrying value (cost plus accrued income) and the unfunded commitment disclosed separately. For fund-level NAV calculations, unfunded commitments are typically not included in the NAV but are disclosed in the notes to the LP reporting.

The delayed draw structure is common in acquisition finance (where a private credit fund finances an acquisition with a funded initial tranche and committed future tranches to finance earn-out payments or bolt-on acquisitions) and in growth capital lending (where tranches are available upon achievement of revenue or EBITDA milestones).

Worked example

Clearwater Private Credit Fund III makes a EUR 60 million commitment to Thornfield Industrial Holdings, structured as a DDTL:

Tranche A (funded at closing): EUR 40 million Tranche B (DDTL, available within 18 months upon completion of first bolt-on acquisition): EUR 12 million Tranche C (DDTL, available within 30 months upon completion of second acquisition): EUR 8 million

Commitment fee on undrawn amounts: 1.5% per annum

At closing, the fund advances EUR 40 million and issues a capital call to LPs for their proportional share of the funded amount. The fund begins earning commitment fees on the EUR 20 million undrawn amount.

Fourteen months later, Thornfield completes an acquisition and requests the Tranche B draw of EUR 12 million. The fund administrator confirms the draw conditions are satisfied, verifies the borrower's account details through the verified payee registry, and processes the advance. A new capital call is issued to LPs for their share of the EUR 12 million draw. Commitment fees continue on the remaining EUR 8 million undrawn Tranche C.

The fund tracks three separate balance entries for this investment: Tranche A carrying value, Tranche B carrying value (from the draw date), and the EUR 8 million unfunded Tranche C commitment.

Frequently asked questions

How does a DDTL differ from a revolving credit facility? A revolving credit facility (RCF) allows the borrower to draw, repay, and redraw up to the facility limit repeatedly during the availability period. A DDTL is a term loan: once a tranche is drawn, it amortises or matures on a fixed schedule and cannot be redrawn. The key distinction is that an RCF provides flexibility for working capital management (the borrower adjusts the drawn balance as needed), while a DDTL provides a committed future capital advance for a specific defined purpose.

What happens if a borrower does not draw on a DDTL tranche before the availability window expires? If a draw is not requested before the end of the availability period, the unfunded commitment typically expires automatically, and the borrower loses the right to draw that tranche. The fund is released from its funding obligation, and commitment fees cease. The credit agreement will specify whether any conditions allow for the availability period to be extended by agreement.

How does the fund administrator track unfunded DDTL commitments? Unfunded DDTL commitments should be recorded in the fund accounting system as contingent obligations, separate from the funded loan balance. The system should track the total commitment, the amount drawn to date, the remaining undrawn commitment, the availability period end date, and any conditions precedent to draw. This information is needed for LP reporting, for capital call planning (to anticipate future liquidity needs), and for subscription line management.

Do unfunded DDTL commitments appear in a private credit fund's NAV? No. Unfunded commitments are not assets and are not included in the fund's NAV calculation. They are disclosed as off-balance-sheet commitments in fund reports and LP statements. The funded portion of the loan is included in the NAV at its carrying value (cost plus accrued income, subject to any credit adjustments).

How are commitment fees on undrawn DDTLs distributed to LPs? Commitment fees are cash income earned by the fund from the date of the commitment and are typically distributed to LPs in proportion to their participation in the applicable investment. For funds using a subscription credit facility to manage timing, commitment fees received before the LP capital call is issued may accrue to the facility or be retained in the fund's income account. The distribution of commitment fee income should be defined in the fund's LPA or side letters.

Related terms

Revolving credit facility (private credit fund context), Subscription line / capital call facility, PIK interest / PIK accrual, Amortisation schedule in private credit fund administration, Capital call

Related pages

Private credit fund administration: operational guide, Swelv for private credit fund administrators