Cash Sweep
Definition
A cash sweep is a credit agreement provision requiring a borrower to use specified cash receipts to repay debt ahead of schedule. The swept cash may come from excess cash flow, asset sales, casualty or insurance proceeds, debt issuance, equity issuance, or other extraordinary receipts. In private credit and leveraged finance, cash sweeps sit between ordinary amortization and default remedies: the borrower remains current, but lender documents force deleveraging when cash is available.
Why it matters
Cash sweeps are one of the quiet control levers in private credit. A loan can look covenant-compliant and still give lenders a large share of free cash flow if the excess-cash-flow sweep is tight. For lenders, the provision converts operating upside, sale proceeds, or one-time receipts into faster de-risking. For sponsors, it can reduce equity optionality: cash that might have funded M&A, dividends, growth capex, or working-capital cushion instead pays down debt. The economics are especially important in slower-growth middle-market companies where the difference between a 25% and 75% excess cash flow sweep can decide whether equity compounds or merely services the lender.
Common misconceptions
- •A cash sweep is not the same as scheduled amortization; it is triggered by excess or specified cash flows.
- •A sweep does not always apply to every dollar of cash. Most agreements include baskets, reinvestment rights, retained-cash amounts, leverage step-downs, and exclusions.
- •A cash sweep can improve credit quality while lowering equity optionality.
- •The phrase excess cash flow sounds intuitive, but the contractual definition can differ sharply from accounting cash flow.
- •A borrower can be profitable and still have little distributable cash after required sweeps, capex, working capital, taxes, and debt service.
Technical details
Common Sweep Sources
Excess cash flow sweep: Requires a percentage of annual or quarterly excess cash flow to repay loans. The sweep percentage often steps down as leverage falls. Example: 75% sweep above 4.5x leverage, 50% between 3.5x and 4.5x, 25% below 3.5x, and 0% below 2.5x.
Asset-sale sweep: Net cash proceeds from selling assets must repay debt unless reinvested in the business within a specified period. The reinvestment right is critical: a borrower selling a non-core plant may be allowed to buy replacement equipment instead of immediately repaying loans.
Casualty or insurance sweep: Proceeds from insurance recoveries or condemnation events may be swept unless used to repair or replace the affected assets.
Debt or equity issuance sweep: New debt proceeds often repay existing debt; equity proceeds may be partly retained or partly swept depending on whether the capital is raised for growth, cure rights, or deleveraging.
How Excess Cash Flow Is Usually Built
The starting point is often EBITDA or consolidated net income, then adjusted for taxes, cash interest, scheduled principal payments, capital expenditures, working-capital changes, permitted acquisitions, restructuring charges, and other negotiated items.
Small drafting changes can move real money. If growth capex is excluded from excess cash flow, management can reinvest before sweeping. If only maintenance capex is excluded, more cash may be trapped for lenders.
Working-capital treatment is a common pressure point. A temporary receivables build or inventory investment can reduce available cash even when EBITDA is strong. Lenders may cap add-backs or require true cash movement rather than accounting estimates.
Numerical Example
Assume a borrower generates $20 million of EBITDA, pays $6 million of cash interest, $2 million of taxes, $3 million of capex, and has $1 million of scheduled amortization. Before working-capital adjustments, excess cash flow is roughly $8 million.
If leverage is above the step-down threshold and the sweep percentage is 50%, the borrower must use $4 million to repay debt. If the sweep is 75%, the mandatory prepayment rises to $6 million. That $2 million difference may be the sponsor's acquisition budget, liquidity buffer, or dividend capacity.
Sponsor Negotiation Points
Common borrower asks include retained-cash baskets, leverage-based step-downs, broader growth-capex exclusions, longer reinvestment periods, carry-forward rights for unused capex, and de minimis thresholds before asset-sale proceeds are swept.
Lenders push for tighter definitions when leverage is high, asset quality is uncertain, or sponsor distributions are a concern. In stressed amendments, lenders may add a cash sweep even if the original loan had limited mandatory prepayment requirements.
Diligence Questions
What percentage of excess cash flow is swept at the current leverage level?
Does the sweep step down based on total leverage, first-lien leverage, or another ratio?
Are growth capex, acquisitions, restructuring costs, and working-capital needs deducted before calculating excess cash flow?
How long can asset-sale proceeds be reinvested before they must repay debt?
Does the sweep apply annually, quarterly, or immediately upon receiving proceeds?
Can swept amounts be reborrowed under a revolver, or are they permanent term-loan repayments?