The definition deducts the cash actually spent; the leverage grid then decides how much of what is left goes to the lenders.
The excess cash flow sweep is the agreed percentage of excess cash flow, the cash left after interest, tax, capex, working capital and scheduled amortisation, with the percentage set by a leverage grid at the year end. On an illustrative borrower with 60.0 million of EBITDA, excess cash flow is 21.50, leverage is 3.60 times, the grid applies 25 per cent and the sweep is 5.38 million. A weaker year at 54.0 of EBITDA sweeps more, 7.75, because it lands in the 50 per cent band.
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 →
Term loan B and unitranche agreements require the borrower to prepay a share of each year's excess cash flow, usually within a few days of delivering the annual accounts. The definition starts from Consolidated EBITDA and deducts the cash the business actually spent. The percentage is not fixed: it steps down as leverage falls, so a borrower that delevers keeps more of its cash. The case below is illustrative.
| Input | Value |
|---|---|
| Term loan at the start of the year | 250.0 |
| Scheduled amortisation, per year | 1.0% |
| Cash at the start of the year | 10.0 |
| Consolidated EBITDA | 60.0 |
| Cash interest | 18.0 |
| Cash taxes | 6.0 |
| Capital expenditure | 9.0 |
| Increase in working capital | 3.0 |
| Net leverage | Sweep |
|---|---|
| 4.00x or above | 50% |
| 3.50x to below 4.00x | 25% |
| Below 3.50x | 0% |
Excess cash flow = EBITDA − cash interest − cash taxes − capex − increase in working capital − scheduled amortisation
= 60.0 − 18.0 − 6.0 − 9.0 − 3.0 − 2.50 = 21.50
Net leverage = (247.50 of loan − 31.50 of cash) / 60.0 = 216.00 / 60.0 = 3.60x, so the 25 per cent band applies
Sweep = 25% × 21.50 = 5.38; retained by the borrower: 16.12
In Excel, with excess cash flow in B10 and leverage in B11: =B10*IF(B11>=4,50%,IF(B11>=3.5,25%,0%)), or a LOOKUP on the grid when it has more steps.
Two points of the mechanics matter. Scheduled amortisation is deducted, because the borrower has already paid it to the same lenders; leave it in and excess cash flow is 24.00 and the sweep 6.00, an overpayment of 0.62. And on a net leverage grid the sweep does not change the band it is paid in: paying 5.38 off the loan reduces gross debt to 242.12 and cash to 26.12, and net debt stays at 216.00. A grid tested on gross leverage, pro forma for the payment, behaves differently and can become circular. Read which one the agreement uses.
Run the same year at different levels of EBITDA, holding interest, tax, capex and working capital constant.
| EBITDA | Excess cash flow | Net debt | Leverage | Band | Sweep | Retained |
|---|---|---|---|---|---|---|
| 50.0 | 11.50 | 226.00 | 4.52x | 50% | 5.75 | 5.75 |
| 54.0 | 15.50 | 222.00 | 4.11x | 50% | 7.75 | 7.75 |
| 60.0 | 21.50 | 216.00 | 3.60x | 25% | 5.38 | 16.12 |
| 66.0 | 27.50 | 210.00 | 3.18x | 0% | 0.00 | 27.50 |
| 72.0 | 33.50 | 204.00 | 2.83x | 0% | 0.00 | 33.50 |
The sweep is not monotonic in performance. At 54.0 of EBITDA the borrower generates 6.00 less cash than at 60.0 and pays 7.75 instead of 5.38, because leverage of 4.11 times puts it in the 50 per cent band. The grid has cliffs: on this case leverage crosses 4.00 times at 55.20 of EBITDA and 3.50 times at 61.33. Just below 55.20 the sweep is 8.35; just above it, 4.18. A few tens of thousands of euros of EBITDA moves 4.17 million of cash between the lenders and the borrower.
That cliff is what makes the year-end leverage figure worth managing. A borrower near a band boundary has every reason to make sure the year-end Consolidated EBITDA includes every permitted add-back, and a lender reading the certificate has every reason to check them.
Most agreements credit voluntary prepayments made during the year against the sweep, euro for euro. A borrower that prepays 4.0 in the third quarter owes 1.38 in the spring, and the total paid is the same 5.38. The credit does not save cash; it moves the timing and lets the sponsor choose the tranche. Read the list of deductions closely, because each one is negotiated:
Every deduction lowers excess cash flow before the percentage applies, so on a 50 per cent band each euro deducted saves the borrower 50 cents of prepayment.
The usual error is to apply the grid to the wrong leverage figure: the opening ratio, the covenant ratio from the last quarterly certificate, or a gross figure where the grid says net. On this case the difference between 3.60 and a figure just over 4.00 is the difference between 5.38 and 10.75 of prepayment. The second most common is forgetting the amortisation deduction, which overstates the sweep by the amortisation times the band.
Excess cash flow is EBITDA less the cash actually spent and the scheduled amortisation; the sweep is that figure times the band set by year-end leverage: 21.50 times 25 per cent, or 5.38, here. Model the band boundaries, not just the base case, because the grid can make a weaker year more expensive. The book's Kestrel facility runs the sweep through twenty-eight quarters in the free workbook for this book. For another clause of the same agreement taken to a number, see what an MFN pays the existing lender on the incremental debt side.
Yes in almost every term loan definition, because it has already been paid to the same lenders. In the illustrative case, leaving the 2.50 of amortisation in raises excess cash flow from 21.50 to 24.00 and the sweep at 25 per cent from 5.38 to 6.00, an overpayment of 0.62 million.
Usually euro for euro. A borrower that prepays 4.0 during the year owes 1.38 instead of 5.38 at the sweep date, so the total paid is unchanged. The credit gives the sponsor control over timing and tranche, not a saving. If the agreement instead deducts the prepayment from excess cash flow before the percentage, it is worth only the band rate, 25 cents per euro here.
The agreement names it, typically net or total leverage at the financial year end, tested on the annual compliance certificate. The choice matters near a boundary: on the illustrative case crossing 4.00x at 55.20 of EBITDA doubles the band from 25 to 50 per cent.
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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