Distribution Lock-Up
Definition
A distribution lock-up is a loan agreement provision that stops a project paying distributions to its owners unless a set of conditions is met, typically a minimum debt service coverage ratio, fully funded reserves and no default. When a test fails, cash that would have gone to equity is held in a lender-controlled account. It is released if the tests are met later, or applied to repay debt if they keep failing.
Why it matters
A lock-up is the mechanism by which a lender's protection becomes an equity investor's missing distribution. It can last quarters and, if it persists, permanently redirect cash to repay debt. Investors should ask what the lock-up conditions are, how close the project runs to them, whether it has been locked up before, and what happens to trapped cash.
Common misconceptions
- •A lock-up is not a default; the project can be current on its debt and still locked up.
- •Trapped cash is not lost by definition, but it can be swept to prepay debt if the tests keep failing.
- •Any one failed condition can lock up distributions, not only coverage.
- •A missed reporting deadline can hold back cash; Pelican's Jaw releases nothing until the DSCR calculation is delivered.
Technical details
Sequence in the Pelican's Jaw financing (sections 7.3, 7.8)
Distribution date: conditions tested.
Any condition fails: cash after waterfall steps one to nine goes to the Distribution Reserve Account.
Later date, conditions met: the borrower may withdraw the balance.
DSCR below 1.15x on the second consecutive payment date: the agent may apply the balance to mandatory prepayment.
Shortfall in debt service or a continuing default: the reserve can be drawn to pay senior items.
How investors apply the term
Investors usually apply this term by tying the definition back to the controlling documents and then asking which cash flows, rights, restrictions, or valuation assumptions it changes. A useful review looks at the term alongside fees, leverage, liquidity, reporting frequency, and manager discretion rather than treating it as a standalone concept.
The practical diligence test is simple: identify who benefits if the assumption is wrong, who has control when conditions change, and what evidence the investor receives after closing. Terms that cannot be reconciled to documents, cash movements, and monitoring data should be treated as marketing shorthand until proven otherwise.
Frequently asked questions
- When can lenders block distributions to infrastructure investors?
- Whenever a distribution condition fails. In the Pelican's Jaw financing agreement, filed as an exhibit to SB Energy's 2026 S-1, distributions require that term conversion has occurred and bridge loans are repaid, no default is continuing, the debt service reserve and the early generation, augmentation and IDS reserves are at their minimums, no letter of credit loans are outstanding, the debt service coverage ratio is at least 1.15x, and a certificate confirming all of it has been delivered.
- Where does the cash go?
- To a Distribution Reserve Account. If the conditions are not met by the last possible distribution date for a quarter, amounts after the first nine steps of the waterfall are transferred there.
- Does locked-up cash ever come back?
- It can. If the conditions are satisfied on a later distribution date, the borrower may withdraw the balance. But if coverage is below 1.15x on the second consecutive payment date after cash was trapped, the administrative agent can direct the whole balance to 'a mandatory prepayment,' so the cash repays debt instead of reaching equity.
- Is it the same as a cash sweep?
- Related but different. A lock-up traps cash and may later release it; a cash sweep applies cash to prepay debt. In the Pelican's Jaw financing a lock-up that persists turns into a sweep.