The add-on will be structured as a delayed-draw facility, sources said. The use of this funding is two-fold: half the proceeds are to fund M&A, and the other half is to fund interest payments on Higginbotham’s current term loan. The total loan, funded and unfunded facilities combined, totals $2.095bn, according to a company statement — putting it among one of the larger private loans on record.

Higginbotham is just one of the many companies that are vying for this type of financing that could enable them to raise additional debt to pay the interest on existing loans. The company’s existing debt carries a spread above 500bps, according to BDC filings.

Case for lenders

DDTLs are typically used to fund acquisitions. With the commitment in place, a company can pounce on the purchase of a company to follow up on the buy-and-build strategy.

Providing a DDTL to help a company pay the interest on other debt, however, is a much less appealing use of proceeds for lenders. In the case of Higginbotham, not all current holders of the existing loan opted to fund the incremental loan, 9fin reported.

However, some lenders might still consider it a good opportunity to get into a company’s capital structure.

“You have new lenders come in [to a good asset] and they're just being opportunistic,” said a private credit lawyer. “Yes, the proceeds are going to pay back a different lender, but there might be something that the new lender sees in the company that's attractive.”

Meanwhile, sponsors, by having the option of additional liquidity when needed, are effectively securing a safety net for companies that anticipate near-term problems paying out their interest. It can also be a way to support a company until interest rates come back down, sources said.

These options are especially useful for companies struggling with their debt burden as interest rates remain higher than they have been for decades. Add to that the twin pressures of inflation and labor costs, and a DDTL can help a borrower stave off a potential default.

“Existing lenders may be attracted to that [DDTL solution] to avoid having to report a payment default, and to kick the can and keeping liquidity at a manageable level, with the hope that in six to 12 months things can turn around,” the lawyer said.

Another purpose for a DDTL is almost like a “reload feature” for a revolving credit facility, which has been drawn down, said one head of direct lending at a large asset manager. By paying down their revolver after drawing from it, companies can access what is normally lower interest-bearing debt later down the line.

“Sponsors can use their revolvers and then clean them down through the draw of a DDTL,” the direct lending head said. “Cash is fungible…[and] there's been other sort of creative structures that get around that that have been in the market for some years.”

Portfolio management

In the end, the DDTL functions as an alternative to adding a PIK instrument, which is sometimes viewed unfavorably by LPs in private credit funds.

The pivot to using DDTLs makes sense as many private credit firms, which have provided a number of PIK facilities, are maybe coming to the limits of what is allowed in their portfolio, said one co-head of a private credit fund.

A typical direct lending fund, for instance, predominantly invests in first lien instruments, while only allowing for small percentage of investments to be in PIK and equity type investments.

“I think a few of the market participants are probably getting close to their restrictions on their PIK baskets within their leverage facilities,” the co-head said. “I think that LPs are also really focused on what percent of a portfolio is PIK-ed versus cash pay, and so instead they’re [committing to] more debt, even if it's only going to repay themselves.”

Still, not everyone is on board with such a proposition, as raising incremental debt to cover the interest on other loans seems convoluted — and doesn’t exactly paint a picture of financial health.

“Frankly, I find it to be a little bit unnatural,” said the direct lending co-head.