Cash sweep

The credit agreement defines excess cash flow and requires a percentage of it, often 50% to 75%, to prepay the loans. That percentage frequently steps down as leverage falls, rewarding the borrower for deleveraging.

The order is dictated by the waterfall and starts at the top: revolver, then senior term loans, working down. That is the opposite of what a borrower would choose, since repaying the cheapest debt first saves the least interest, but the sweep exists for lender protection rather than borrower economics.

It is the mechanism behind deleveraging in an LBO model, and it is what makes the debt schedule circular: cash available depends on interest, interest depends on the balance, and the balance depends on what was swept.

Sponsors negotiate the definition of excess cash flow hard, since deductions for capex, acquisitions and permitted payments determine how much is actually captured.