medium · Private Equity advanced-lbo
A company has $100 million of Senior Term Loan A (amortizing) and $100 million of Senior Term Loan B (bullet).
If the company has $20 million of excess cash flow for a mandatory sweep, where is it typically applied first?
- Split equally across every debt tranche to preserve the original capital structure's proportional balance.
- Applied to Term Loan B first, since it carries a higher interest rate and the sponsor wants to maximize interest savings.
- Term Loan A, because lenders prefer to pay down lower-cost senior tranches first to reduce total interest drag.
- Distributed as a dividend to shareholders instead, provided leverage remains below a covenant-specified threshold.
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