Cash Sweep
Private Equity glossary · Advanced LBO Modeling Mechanics & Deal Structuring
Definition
Mandatory prepayment mechanism in a credit agreement requiring a specified percentage of excess cash flow (ECF) to be applied to debt repayment, before any sponsor distribution or growth investment. Typical structure: 50-75% ECF sweep stepping down with leverage ratio improvements (e.g., 75% if leverage >5.0x, 50% if 4.0-5.0x, 25% if <4.0x, 0% if <3.0x). Accelerates de-leveraging and reduces refinancing risk but consumes the cash that would otherwise fund dividend recaps or growth capex; modern sponsor-friendly credit agreements minimize sweep mechanics.
Cash Sweep in plain English
When a private-equity firm buys a company using borrowed money, a 'cash sweep' is a rule in the loan contract that forces the company to use a big slice of its leftover cash to pay down that debt first — before the owners can pocket any profit or spend on growth. The percentage usually shrinks as the debt gets smaller: maybe 75% of spare cash while debt is high, dropping toward 0% once it's low. It's like a strict budget where most of your extra paycheck automatically goes to crushing your loans before you're allowed to splurge. This makes the company safer and less debt-heavy, but owners dislike it because that swept cash can't be used to pay themselves dividends — so today's owner-friendly loan deals try to keep sweeps small.
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