Cash Sweep Explainer
A cash sweep is a loan feature that requires a borrower to use specified excess cash to repay debt ahead of schedule. The agreement defines the cash-flow measure, permitted deductions, testing dates, and percentage swept. It is common in leveraged finance because lenders want debt reduced when the business produces more cash than its budgeted needs.
The calculation usually begins with operating cash flow and subtracts taxes, approved capital spending, working-capital needs, and other negotiated items. A borrower may keep a minimum cash balance before applying the sweep. Some structures reduce the sweep percentage after leverage falls below stated thresholds, giving management more flexibility as credit risk improves.
Sweeps accelerate deleveraging without a fixed extra installment, so payments rise in strong periods and may disappear in weak ones. They can lower future interest expense and reduce refinancing risk. For sponsors and owners, however, the same mechanism can delay dividends, acquisitions, or reinvestment because free cash is redirected to lenders.
The headline percentage never tells the whole story. Definitions of excess cash flow, carryforwards, voluntary prepayment credits, asset-sale proceeds, and exceptions can materially change the amount due. Borrowers should forecast liquidity under several operating cases, while lenders should test whether broad deductions or delayed reporting could weaken the intended protection.
A negotiated share of defined excess cash is applied to principal.
The sweep supplements, rather than replaces, scheduled payments.
Taxes, investment, working capital, and minimum cash may be deducted.
Small drafting differences can materially change the payment.
Sweep percentages may step down as leverage falls.
That rewards deleveraging while preserving lender protection.
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