medium · Private Equity & LBOs
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 between all debt tranches to maintain the original capital structure balance.
- Term Loan B, because it has a higher interest rate and the sponsor wants to save more interest expense.
- 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, provided leverage is below a certain threshold.
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