The asset sale sweep turns on four defined terms: Net Proceeds, the reinvestment right, the step-down and the sharing with other first lien debt.
Start from Net Proceeds (price less costs and taxes), deduct what is reinvested within the reinvestment period, apply the step-down percentage at the leverage the agreement specifies, then share the result ratably with any pari passu secured debt. On an illustrative $50m disposal with $46m of Net Proceeds and $20m reinvested, pro forma first lien leverage of 4.89x puts the sweep at 100 per cent: $26.0m must be offered, of which $20.09m goes to the term loan. Test leverage on pre-sale EBITDA instead and you get half that.
Worked in full in How to Read a Credit Agreement by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
The asset sale sweep is the mandatory prepayment that stops a borrower from selling the collateral and keeping the cash. It is short in the agreement and long in consequences, because four separately defined terms decide the number: Net Proceeds, the reinvestment right, the leverage-based step-down and the sharing with other first lien debt. Each one is a place where borrower and lender counsel read the same clause differently.
| Input | Value |
|---|---|
| Sale price of the division | 50.0 |
| Transaction costs | 1.5 |
| Taxes payable on the gain | 2.5 |
| Reinvested in the business within 12 months | 20.0 |
| Term loan outstanding | 340 |
| Pari passu senior secured notes | 100 |
| LTM EBITDA before the sale | 100 |
| EBITDA of the division sold | 10 |
| Step-down on first lien leverage | 100% above 4.50x; 50% above 4.00x; 0% at or below 4.00x |
Net Proceeds = cash price − costs of the sale − taxes paid or reasonably estimated as payable
= 50.0 − 1.5 − 2.5 = $46.0m
The definition usually also deducts debt secured on the asset that must be repaid and reserves for indemnities, which can come back into the sweep if released. Here there are none. Most agreements add a de minimis threshold (say $5.0m per transaction); this sale is far above it.
Proceeds subject to the sweep = Net Proceeds − amounts reinvested in the reinvestment period
= 46.0 − 20.0 = $26.0m
The borrower typically has 12 months to reinvest in assets useful in the business, often extended by a further 6 months if it signed a binding commitment within the first 12. Whatever is unspent at the end is swept. In practice this means the lender waits up to a year and a half to learn the amount.
First lien leverage pro forma for the disposal = (340 + 100) ÷ (100 − 10) = 440 ÷ 90 = 4.89x
4.89x is above 4.50x, so the applicable percentage is 100%. Sweep = 26.0 × 100% = $26.0m.
The leverage test should remove the EBITDA of the business sold, because that is what the lenders lose. Agreements that define the ratio “on a pro forma basis” for dispositions do exactly that. Some go further and test after giving effect to the prepayment itself: (440 − 26.0) ÷ 90 = 4.60x, still above 4.50x here, so the answer does not change.
Term loan share = 340 ÷ 440 = 77.27%
Term loan prepayment = 26.0 × 77.27% = $20.09m; offer to noteholders = $5.91m
Excel: =MAX(0,NetProceeds-Reinvested)*Pct*TL/(TL+Notes)
The notes indenture has its own asset sale covenant, normally an offer to purchase at par. Amounts that term lenders decline to take (many agreements let them) usually return to the borrower as retained proceeds, which can also feed the builder basket.
| Use | $m |
|---|---|
| Costs and taxes | 4.0 |
| Reinvested by the borrower | 20.0 |
| Prepayment of the term loan | 20.09 |
| Offer to the noteholders | 5.91 |
| Total | 50.0 |
After the sweep the term loan stands at $319.91m and total first lien debt at $414m.
| Division EBITDA | Pro forma EBITDA | Pro forma leverage | Step-down | Nothing reinvested | $20m reinvested | $35m reinvested |
|---|---|---|---|---|---|---|
| −5 | 105 | 4.19x | 50% | 23.0 | 13.0 | 5.5 |
| 0 | 100 | 4.40x | 50% | 23.0 | 13.0 | 5.5 |
| 5 | 95 | 4.63x | 100% | 46.0 | 26.0 | 11.0 |
| 10 | 90 | 4.89x | 100% | 46.0 | 26.0 | 11.0 |
Two things stand out. The step-down is a cliff: any division earning more than $2.2m of EBITDA pushes leverage over 4.50x and doubles the sweep. And selling a loss-making division lowers pro forma leverage, so the borrower keeps half the unreinvested proceeds of a sale that actually improved the credit. That is arguably the right outcome, but lenders should see it coming.
Testing the step-down on the last compliance certificate. Before the sale, leverage is 440 ÷ 100 = 4.40x, which sits in the 50 per cent tier and gives a sweep of $13.0m, with $10.05m to the term loan. That is $13.0m less than the agreement requires, on a sale that removed a tenth of the EBITDA supporting the loan. If the definition of the ratio is silent on pro forma treatment for the prepayment test, it is a point to raise before signing, not after the disposal closes.
De minimis drafting matters too. If the $5.0m threshold works as a deductible (only proceeds above it count) rather than a trigger, the swept amount falls from $26.0m to $21.0m on the same facts.
An asset sale sweep is Net Proceeds, less reinvestment, times the step-down percentage at pro forma leverage, shared ratably with pari passu debt. Here it is $26.0m, $20.09m of it to the term loan. The same structure of definitions drives the excess cash flow sweep, and the Kestrel facility in the free workbook for this case runs both through twenty-eight quarters.
The cash received from an asset sale less the costs of the sale, the taxes paid or estimated as payable, and usually any debt secured on the asset that must be repaid and reserves for indemnities. On a $50.0m sale with $1.5m of costs and $2.5m of taxes, Net Proceeds are $46.0m.
The borrower may keep proceeds it reinvests in the business, typically within 12 months, extended by 6 if committed. Only the unspent remainder is swept. Of $46.0m of Net Proceeds, reinvesting $20.0m leaves $26.0m subject to the step-down and the prepayment.
It should be tested pro forma for the disposal, removing the EBITDA sold. In the illustrative case leverage is 4.40x before the sale but 4.89x after it, which moves the sweep from 50 to 100 per cent and from $13.0m to $26.0m. Read the definition of the ratio, not just the step-down table.
This article is one calculation from How to Read a Credit Agreement. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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