Mandatory amortisation
DCFThe scheduled principal repayments a credit agreement requires, which reduce cash available to shareholders whether or not the business can spare it.
Also written: mandatory debt repayment, scheduled amortisation, amortisation schedule
Mandatory amortisation is the contractual repayment profile attached to a loan, typically expressed as a percentage of the original principal each year. It is separate from interest, which is the cost of the money, and separate from any voluntary prepayment the borrower chooses to make.
It matters in a levered cash flow build because it sits between the cash the business generates and the cash a shareholder could receive. Unlevered free cash flow ignores it entirely, which is precisely why the unlevered method needs no debt schedule.
European leveraged structures differ here in a way worth knowing. A traditional bank term loan amortises, while institutional tranches and unitranche facilities from private credit funds are typically bullet, repaying the whole principal at maturity. A bullet structure leaves more cash inside the business during the life of the loan and concentrates the refinancing risk at the end.
The related mechanism is the cash sweep, which requires a share of surplus cash to be applied to debt above the mandatory schedule. Mandatory amortisation is fixed and known in advance; the sweep depends on how the business performs, which is why a debt schedule has to model the two separately.
Worked example
A term loan of 500 amortises at 5% of original principal a year, so 25 falls due annually with the balance at maturity.
A business generating 100 of unlevered free cash flow pays 40 of interest, which costs 30 after tax at a 25% rate, leaving 70. Deduct the 25 of mandatory amortisation and levered free cash flow is 45.
Refinance the same debt as a bullet facility and levered free cash flow is 70 rather than 45, with the whole 500 falling due in a single year instead.