After a loan closes, money keeps moving. The borrower may draw more, repay on schedule or early, and lenders may sell parts of their positions. Each event changes how much the lender holds, how much interest it earns, and what its records should show.
Operations teams process these events every day. This lesson walks through the main ones using the Alder Ridge Logistics loan, where Kestrel Point Direct Lending Fund I holds 60% alongside another lender.
Fundings
A funding is money the lenders advance to the borrower.
- At closing, the term loan is funded in full. Each lender sends its share to the agent, which passes the total to the borrower.
- Delayed-draw term loans (DDTLs) let the borrower draw more later, often to fund acquisitions (PC101 3.2). The borrower sends a funding notice to the agent, which asks each lender for its pro rata share by a set date.
- Revolvers can be drawn, repaid and drawn again, so fundings and repayments can happen often.
Until a DDTL or revolver is drawn, lenders commonly earn a commitment fee (or ticking fee) on the undrawn amount. Once it is drawn, the new amount starts earning interest from the funding date, sometimes with its own interest period.
For operations, each funding means cash out, a larger position, and a change in expected interest. It also usually means a capital call or a draw on the fund's own credit facility to pay for it (Module 3).
Repayments
Money comes back in three main ways.
| Type | What it is | Premium? |
|---|---|---|
| Scheduled amortization | Regular repayments set in the credit agreement, often a small percentage of the loan each year, paid quarterly | No |
| Mandatory prepayment | Repayments the agreement requires in set events, for example from the proceeds of asset sales or from excess cash flow | Commonly no, but the agreement decides |
| Voluntary prepayment | The borrower chooses to repay early, for example from a refinancing or a sale of the company | Commonly yes, during the call protection period |
Repayments are shared pro rata, like interest. If Alder Ridge makes a $5.0m amortization payment, Kestrel Point's fund receives 60%, or $3.0m.
Voluntary prepayment with call protection
The following example is illustrative. Alder Ridge's loan has call protection of 102 in year 1 and 101 in year 2 (PC101 3.2). Suppose that in year 1 it repays $40m early.
| Item | Amount |
|---|---|
| Principal repaid | $40,000,000 |
| Prepayment premium (2% in year 1) | $800,000 |
| Accrued interest on the $40m to the repayment date | Commonly paid at the same time |
Kestrel Point's fund receives 60% of each: $24m of principal and $480,000 of premium, plus its share of accrued interest. The loan outstanding falls to $60m, so the next interest payment is smaller. Lesson 2.1 shows what happens to the loan's unamortized OID when it's repaid early.
Selling part of a position
Lenders sometimes sell part of their position, for example to manage concentration or to make room for other loans. There are two ways to do it.
- Assignment: the buyer takes over the position and becomes a lender of record. The agent adds it to the register, and it receives payments and votes directly. Credit agreements commonly require the consent of the agent and, outside a default, the borrower, sometimes with limits on who can buy.
- Participation: the seller keeps the position on the register but passes the economics to the buyer, called the participant. The participant has rights only against the seller, not the borrower, and usually limited voting rights.
Assignments are more common where the buyer wants a direct relationship. Participations are simpler to set up but leave the buyer exposed to the seller as well as the borrower.
Trade settlement
A loan sale is agreed on the trade date and completed on the settlement date. In between:
- The buyer and seller agree price and terms, including who gets the interest that accrues before settlement.
- They sign the transfer documents: an assignment agreement, or a participation agreement.
- For an assignment, the agent and borrower give any required consents, and the agent processes the transfer.
- On settlement, the buyer pays the seller and the agent updates the register.
Private loans don't settle through an exchange, so settlement can take noticeably longer than for listed securities. Operations teams track open trades carefully: until settlement, the seller is still the lender of record, and payments still come to it.
Key terms
- Funding notice: The borrower's request, sent through the agent, for lenders to advance money.
- Delayed-draw term loan (DDTL): A commitment the borrower can draw after closing.
- Scheduled amortization: Regular principal repayments set in the credit agreement.
- Mandatory prepayment: A repayment the agreement requires in set events, such as asset sales.
- Voluntary prepayment: An early repayment the borrower chooses to make.
- Assignment: A sale that makes the buyer a lender of record.
- Participation: A sale where the seller stays the lender of record and passes on the economics.
- Trade date / settlement date: When a loan sale is agreed, and when it completes.
Key takeaways
- Fundings increase a lender's position and its expected interest; repayments reduce them.
- Scheduled, mandatory and voluntary repayments are shared pro rata among lenders.
- Voluntary prepayments during the call protection period commonly carry a premium, such as 2% in year 1.
- Assignments transfer the position on the register; participations leave it with the seller.
- Records move at settlement, when the agent updates the register and cash changes hands.
This lesson is for educational purposes only and is not investment advice.