Module IV· Cash SweepIntermediate
Question
How do you model 'step-up' mandatory amortization (e.g. rising 1%/2%/5%) in a term loan?
Answer
Mechanics
Step-up amortization = a repayment schedule where the % per year rises (e.g. 1% Year 1, 2% Years 2-3, 5% Years 4-5, bullet for the rest). Standard in the US TLB, occasional in Europe.
Deep diveShow more details
Example — TLB $200m, 7 years
| Year | Amort % | Repayment $m | Year-End Balance |
|---|---|---|---|
| 1 | 1% | 2.0 | 198.0 |
| 2 | 2% | 4.0 | 194.0 |
| 3 | 2% | 4.0 | 190.0 |
| 4 | 5% | 10.0 | 180.0 |
| 5 | 5% | 10.0 | 170.0 |
| 6 | 5% | 10.0 | 160.0 |
| 7 | 80% bullet | 160.0 | 0 |
Consequence
Cash needs are low up front (sponsor-friendly), but the bullet in the final year needs refinancing or an exit. Refinancing risk = market conditions in Year 7.
Common pitfalls
- Modeling: the % on the Year-Begin balance OR on the original face value — contractually often original face
- For the Year 7 refinancing the sponsor must have a new source (exit, recap, refinancing)
Pitch tip
Question: "Which repayment structure would you negotiate?"
Answer: "Step-up with a bullet on the TLB, because the sponsor has more cash for IRR-relevant investments early on. The sweep covers the refi risk"