As the leveraged lending market remained strong in the first quarter of 2018, the market saw increasingly favorable terms for financial sponsors and borrowers. A very positive supply/demand balance, driven in part by strong CLO origination and improved retail inflow, brought post credit-crisis lows for leveraged loan pricing margins, an increased number of cov-lite financings and improved terms generally.
One such area of improvement is for delayed draw term loan (“DDTL”) tranches. This led to DDTLs becoming much more popular with borrowers in the 1Q of 2018, including recent deals for Dubois Chemicals, Inc., Dohmen Life Sciences Services, OSG Billing and Tekni-Plex.
DDTL terms for ticking fees, upfront fees and the availability period have improved as follows:
- Ticking Fees – The average initial ticking fee for DDTLs has decreased from 194.7 bps in 2017 to 172.1 bps year-to-date. Also, there has been an increase in the number of loans with an advantageous flat fee rather than a fee that grows to the full applicable margin.
- Upfront Fees – Borrowers have continued to negotiate lower upfront fees and shift more fees to be paid when the DDTL is borrowed rather than at the closing of the DDTL commitment.
- Availability Period – The average availability period for DDTLs has increased by over six months from 2017 to about 17 months, giving borrowers a longer opportunity to draw on the DDTL.
As we enter the 2Q of 2018, in light of this hot market for DDTLs, sponsors and borrowers are increasingly opting to secure DDTLs to fund future acquisitions and to obtain a dependable source of liquidity for the near term.