Whilst future funding requirements can be achieved via an incremental facility, a DDTL is a committed line of credit. This may be more appealing to a sponsor, particularly if the intention is to pursue a “buy-and-build strategy” – whether it’s attractive from an economics perspective will depend on the fees payable on the DDTL and the timing for payment.
DDTLs are also a feature of many European private capital funded transactions (more commonly referred to as a “CAR” or a “CAF”) and have been present in the U.S. market for some time. Historically, where seen in syndicated deals in Europe, DDTLs were provided by club banks and no syndication was contemplated (similar to the RCF). It is the proposed syndication of the DDTL alongside the term loan B (TLB) that has been the subject of discussion on recent transactions.
A&O Shearman has been helping clients navigate these issues and, whilst there is currently no market position and the precise terms vary, set out below is a high-level summary of the key issues which we have seen arise on syndicated deals with a DDTL.
Syndicate investors
Traditionally, arrangers syndicate leveraged loans to institutional investors. Syndicating a DDTL can prove to be more challenging, because not all institutional investors are willing (or able) to purchase unfunded commitments.
Even if an investor can acquire unfunded commitments, there may be a question as to which entity is responsible for funding when a drawdown request is submitted. Discussion points include whether this is:
- The investor itself. This is unlikely to be the sponsor’s preferred option given that it will involve taking risk on each investor funding its share at the required time;
- The arrangers fronting on behalf of the investors. This is unlikely to be the arrangers’ preferred option given the customary length of the availability period and the position on fees (see below); or
- The facility agent fronting on behalf of the investors in return for payment of a fronting fee. This is likely to prove commercially challenging to arrange and will limit the choice of facility agent as a financial institution would need to undertake the role.
Transfer provisions
Sponsors can be expected to want to control transfers, particularly in relation to unfunded DDTL commitments, to ensure they are not transferred to entities which they do not consider to have equivalent credit worthiness. Discussion points include whether:
- A minimum rating condition applies – this is similar to that required for the RCF, although institutional investors are unlikely to satisfy this condition;
- The right to transfer commitments in respect of the DDTL, whether funded or unfunded, should follow the agreed position in respect of the TLB; and
- The arrangers should stand behind the investors in the DDTL for the certain funds period in the same way that they would for the TLB.
The length of the certain funds period, and the restriction on transfers during that time, can prove problematic; there may be a discussion as to whether the post-certain funds period regime should apply to drawn DDTL loans regardless of whether the certain funds period has expired.
Commonality of terms with the TLB
The terms for the DDTL (including available currencies) are likely to be broadly similar to those applicable to the TLB, particularly if there is a desire for the DDTL to be fungible with the TLB (see below). There may also be a mechanic whereby, upon utilization, DDTL commitments are immediately re-designated as new TLB loans.
It will also need to be considered whether the DDTL and TLB are required to be held and transferred together. Based on our experience to-date, no official staple of the two facilities is typically contemplated. However, the syndication strategy in relation to the DDTL is likely to involve the DDTL and TLB being sold as a strip, such that, on syndication, investors are required to take a pro rata exposure under the DDTL in order to receive an allocation of the TLB.
Economics
The types of fees payable on the DDTL will be broadly similar to those applying to the TLB. Arrangers will expect these to include an underwriting/arrangement fee and investors will expect to receive OID fees and commitment fees. Ticking fees on the commitment from the allocation date to closing will be expected to reflect the position on the TLB.
Terms related to economics are likely to be flex items but generally, lenders can be expected to request that economics for unfunded DDTL commitments start to accrue as soon as possible.
Arrangers and investors will look for the commitment fee to be structured as a ticking fee such that, following the expiry of a negotiated period, full margin will be payable on unfunded commitments, with the length of any fee-free period and the timing of any interim step-up before accruing full margin being a discussion point.
Conversely, sponsors may seek for such fees to be more closely aligned to those offered for a “CAR” or “CAF” on private capital funded transactions, typically limited to a commitment fee, at a fixed percentage, which starts to accrue from closing.
Discussion points on underwriting and OID fees include:
- Timing for payment, for example whether fees are either all paid on closing or at agreed intervals after closing, or a combination of the two; and
- Whether fees are payable on cancelled DDTL commitments or at the end of the availability period.
Once drawn, the margin and margin ratchet for the DDTL will typically be the same as the TLB.
Flex and fungibility
Whether the arrangers require the flexibility to exercise flex rights independently for the DDTL without needing to flex the TLB will depend on the requirements for the deal. This is likely to be a discussion point in the context of any fungibility requirements for the DDTL and TLB, particularly in respect of pricing flex.
Availability period
Typically up to 24 months from the closing date, although it may be a flex item to shorten this period.
If it is proposed that the DDTL is available on a certain funds basis for the full length of the availability period, discussion points may include the impact this has on other provisions, for example, not overriding any drawdown conditions that apply to the DDTL (see below) and the effect of rendering the transfer provisions more restrictive during the certain funds period.
Drawdown conditions
Whether to include an incurrence test is a key discussion point. Sponsors can be expected to resist a leverage test as a condition to drawing the DDTL and, instead, seek to allow for drawing if there is “permitted debt” capacity under a ratio/debt basket, including by reference to any “no worse than” test applicable to the ratios. Lenders can be expected to push for permitted debt capacity to be limited to the freebie and senior secured ratio/baskets, or at least have this as a flex right.
The timeframe for testing the drawdown condition may also be a point of discussion. As leveraged finance documents often include a concept of an “applicable test date”, which provides borrowers with flexibility as to when calculations are tested, lenders may push for a date of calculation that is no more than a given number of months prior to delivery of a utilization request.
Purpose
It may be a discussion point as to whether the DDTL can only be used for permitted acquisitions and investments or whether it is also available for capex and general corporate/working capital purposes.
Future developments
The number of European leveraged loans which include a syndicated DDTL is increasing and although there has been a degree of variation in the terms agreed, parties remain focused on the ways in which to make the product more appealing to investors. We therefore expect to see more developments in the coming months and anticipate that DDTLs will become a more frequent feature of the European syndicated leveraged loan market.
If you would like to discuss, please do get in touch with any of your usual A&O Shearman contacts.
