Mandatory Prepayment
Corporate Credit Analysis glossary · Credit Metrics & Debt Schedule Modeling
Definition
A contractual requirement to prepay debt from specified sources, such as asset-sale proceeds, excess cash flow sweeps (typically 50-75%), equity-issuance proceeds, or insurance recoveries.
Mandatory Prepayment in plain English
A mandatory prepayment is a rule that forces a company to pay down its loan early — not whenever it feels like it, but automatically whenever certain lucky cash windfalls roll in. The lender's logic is simple: if extra money shows up, some of it should go toward getting repaid rather than all of it staying with the borrower. Common triggers include selling off a business unit, collecting an insurance payout, raising money by issuing new stock, or an 'excess cash flow sweep' — where if the company generates more cash than expected, it must hand over a chunk (often 50 to 75 percent) to shrink the debt. It's like a rule that says every time you get birthday money or a bonus, half of it automatically goes to pay off what you borrowed.
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Practice Mandatory Prepayment
If the sweep percentage is 50%, what is the required prepayment amount?
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