Cash Sweep
Investment Banking glossary · M&A & LBO Modeling Dynamics
Definition
Provision in an LBO credit agreement requiring the borrower to apply a defined percentage of excess cash flow to mandatory debt prepayment. Sits at the bottom of the LBO cash flow waterfall: interest rightarrow mandatory amortization rightarrow capex rightarrow NWC rightarrow taxes rightarrow minimum cash reserve rightarrow optional prepayment (the sweep). Sweep percentages typically step down as leverage declines (e.g., 75% sweep above 5.0× Total Debt/EBITDA, 50% between 4.0-5.0×, 0% below 4.0×).
Cash Sweep in plain English
When investors buy a company using lots of borrowed money (a leveraged buyout), the lenders want that debt paid down fast — so the loan contract includes a cash sweep that automatically grabs a chunk of any leftover cash each year and uses it to repay debt early. 'Leftover' means what remains after the company covers its interest, required loan payments, equipment spending, and a small cash cushion — the sweep scoops from the very bottom of that pile. It's like a rule that every month, whatever's left in your account after all your bills gets thrown straight at your student loan. As the debt shrinks and the company looks safer, the sweep percentage usually eases off, letting the owners keep more cash.
Practice Cash Sweep
In an LBO, what is the primary purpose of a 'cash sweep' provision in a credit agreement?
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