The debt schedule and the cash sweep
Interest, scheduled repayments and the sweep: the order cash is used, and why paydown speeds up.
- Calculate interest across a term loan and notes
- Run the cash waterfall: interest, mandatory amortization, excess cash, sweep
- Work back from the loan repaid to the cash the business generated
- Explain why paydown accelerates, and why the notes are not swept
The intuition
Paying off a credit card: each month you pay the interest, then the minimum payment, and then you decide how much of your leftover money goes toward the balance. Pay more off this month and next month's interest is smaller, so there is more left to pay off again.
A buyout's debt schedule works the same way, except the loan agreement makes the decision for you: a cash sweep forces a set share of the leftover cash onto the cheapest, most senior loan.
Cash before interest → pay interest → pay the mandatory amortization → what is left is excess cash → sweep the agreed share of it onto the term loan. The notes are left alone until they mature.
Why it works
- Two tranches. A term loan: senior, secured, cheaper, prepayable, with a small scheduled repayment each year. Notes: ranking behind it, more expensive, repaid in one go at maturity and usually costly to repay early.
- Interest on each tranche = opening balance × its rate.
- Mandatory amortization is a fixed share of the original term loan, repaid every year.
- Excess cash = cash before interest − interest − mandatory amortization.
- The sweep applies a set share of excess cash to the term loan. The rest stays with the company.
- Paydown accelerates. A smaller loan means less interest next year, so more excess cash to sweep, even if the business earns no more.
| Interest: 400 × 7% + 200 × 9% | 46.0 |
| Cash after interest: 100 − 46 | 54.0 |
| Mandatory amortization: 400 × 5% | 20.0 |
| Excess cash: 54 − 20 | 34.0 |
| Sweep: 34 × 75% | 25.5 (8.5 kept) |
| Term loan at year end: 400 − 20 − 25.5 | 354.5 |
| Year-two interest: 354.5 × 7% + 18 | 42.8 (3.2 less) |
The formulas
Each tranche at its own rate, on its opening balance.
Lenders' interest comes first.
The scheduled repayment.
What is left to sweep.
The agreed share of the excess repays the loan early.
The waterfall run backwards.
Worked example
Year one of the schedule. Work down the waterfall in order: interest, mandatory, excess, sweep.
See it move
Same company. Change how much of the excess cash is swept and what the term loan costs.
- Raise the sweep. More of the excess cash repays the loan, less stays with the company, and year-two interest falls.
- Raise the term loan rate. Interest rises, so excess cash and the sweep fall and the loan is repaid more slowly.
- Compare the full and half sweep bars. The fuller sweep always leaves a smaller loan, and so a lower interest bill in year two.
- Watch the notes. Their interest is paid every year, but their balance never moves.
Run it backwards
Same company, reversed: you see how far the term loan fell, the interest and the scheduled repayment. How much cash did the business generate?
The loan fell by the mandatory amortization plus the sweep, so the sweep is the fall less the mandatory amount. The sweep is a set share of excess cash, so divide by that share. Then add back the mandatory amortization and the interest to climb to the top of the waterfall.
Lenders and analysts read a company's repayments this way to check its cash generation against what it reports.
Traps
Say it in the interview
“How does a cash sweep work in an LBO debt schedule?”
Check yourself
4 fresh questions, with new numbers. Answer each one correctly to finish the chapter. Get one wrong and you will see the full working, then you can try it again with new numbers.
Answers within 1% are marked right. Type the number; $, %, x and M are fine. First tries count toward Learned: the topic is Learned once every chapter is done and 75% of first tries were right.
- Waterfall: interest → mandatory amortization → excess → sweep.
- The sweep repays the senior term loan, not the notes.
- Less debt → less interest → more sweep: paydown accelerates.
- Cash before interest = interest + mandatory + sweep ÷ sweep %.