Cash sweep

A cash sweep is a financing clause that requires the borrower to apply all or part of its surplus available cash to the early repayment of its debt, beyond the contractual instalments. In practice, when the company generates more cash than needed for its operations and normal debt service, a defined fraction of that surplus is automatically used to reduce the outstanding balance.

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This mechanism is common in Leveraged Buy-Out (LBO) structures, where lenders seek to accelerate deleveraging and limit their risk. The percentage swept often depends on the leverage reached: the higher the Leverage ratio (net debt / EBITDA), the greater the share of cash captured, with the constraint easing as debt falls.

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Concretely, an LBO generates 3 MCHF of surplus cash over the year. With a 75% cash sweep as long as leverage exceeds 3 times, 2.25 MCHF is automatically applied to early repayment of the senior debt, accelerating deleveraging at the expense of shareholder distributions.

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For the shareholder, the cash sweep limits the ability to pay dividends or invest until debt is brought to a comfortable level, but it lowers the cost of risk and secures the structure. Its calibration is a key point of financial structuring, balancing the pace of deleveraging against the flexibility left to operations.