Can someone please explain the difference between a cash sweep and a debt sweep and when/how you would use each?

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At the risk of sounding ignorant, what is a debt sweep?


someone can correct me if i am wrong but I believe they refer to the same thing.

cash sweep is a requirement of certain debt covenants to paydown any outstanding debt with available free cash flow. This applies to LBOs and acquisitions in which all cash proceeds from the transaction is used to paydown down debt.

a debt sweep is a term used in LBO models/analysis which assumes that excess cash generated by the bought out business will be used to service debt.


Dayaam is correct. In a typical deal, a portion of excess cashflow as definined in the credit agreement must be used to pay down bank debt. Excess cash flow is typically close to free cash flow, but definitely should never be used as a proxy as you must actually read the CA definition. This was typically a feature of Term Loan A's and Term Loan B's but not always on 2nd Lien stuff. Most of the time a percentage (often 50%) of excess cash flow had to go to pay down bank debt. A company always has the option to pay down more, but this ensured that the Company didn't burn cash and get into trouble later and not be able to repay. Sometime excess cash flow provision have exemption if the cash is being invested in capital projects, etc. Essentially this just prevents a company from giving out big bonuses, buying back stock, etc. with cash that should be used to repay lenders.


Thanks! I suspected the two meaning the same thing...

Is the use of a cash sweep and/or a revolver the most typicall way to balance a fully-integrated financial model?

In reply to darkmatter

Thanks! I suspected the two meaning the same thing...

Is the use of a cash sweep and/or a revolver the most typicall way to balance a fully-integrated financial model?

I think we are talking about different things here. I was referring to contractual cash flow sweeps as included in Credit Agreements, you are just talking about doing a model.

Every model has to include a sweep of some kind (either paydown or build cash) in order to balance. What specifically is used depends on the goals. For an LBO where debt paydown is important, you would definitely use a paydown sweep. Some corporates prefer to keep their debt constant and just refinance when the time comes. You might in this situation just build cash on the balance sheet. Typical full LBO models typically contain toggles to easily turn on or off a sweep and adjust the percent of cash that must be allocated to it, but please note this does not necessarily mean it is a contractual obligation as described in my previous post.


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