What Is a Cash Sweep?
A cash sweep is a mandatory prepayment mechanism written into a credit agreement. After the borrower covers operating needs, interest, and scheduled amortization, a defined percentage of the remaining excess cash flow must be applied to pay down the loan early. The provision protects lenders by shrinking their exposure whenever the business generates more cash than expected.
In modeling, the term also describes the logic block in a debt schedule that automatically directs available cash to optional debt repayment. Whether contractual or purely a modeling assumption, the effect is the same, since surplus cash reduces debt balances instead of sitting idle on the balance sheet.
How a Cash Sweep Works
Leveraged loan agreements typically define excess cash flow through a detailed formula, then require the borrower to sweep a percentage of it, commonly starting at 50 percent. Most agreements include leverage-based step-downs, so the sweep might fall to 25 percent once net leverage drops below a threshold such as 4.0x and to zero below 3.0x, rewarding borrowers who deleverage.
Sweep payments follow the priority of the capital structure. Cash first repays any revolver drawings, then prepays the term loan, while bonds and other non-callable tranches are untouched. In an LBO model, the sweep formula usually takes the minimum of cash available for repayment and the outstanding tranche balance, so the model never pays down more debt than exists.
Why It Matters
For lenders, a sweep converts strong performance into lower risk, since every dollar swept reduces the balance at risk in a downturn. For private equity sponsors, sweeps are a return driver, because faster paydown means more of the enterprise value at exit belongs to equity. A deal that sweeps 100 percent of free cash flow can move exit leverage down several turns over a five-year hold.
Interviewers use cash sweep mechanics to test whether candidates truly understand LBO models. A common question asks how returns change if the sweep percentage rises, and the strong answer connects faster deleveraging to a larger equity claim at exit while noting the tradeoff of less cash retained for reinvestment or acquisitions.
