Module IV· Cash SweepAdvanced
Question
What is an 'excess cash flow sweep' covenant and how is it typically structured?
Answer
Mechanics
An ECF sweep is a contractual clause in the credit agreement that ties the sweep percentage to the leverage ratio — the lower the leverage, the lower the sweep.
Deep diveShow more details
Comparison (typical middle-market step-down structure)
| Senior Debt / EBITDA | Sweep % |
|---|---|
| > 5.0x | 75-100% |
| 4.0x − 5.0x | 50% |
| 3.0x − 4.0x | 25% |
| < 3.0x | 0% |
Consequence
The sponsor has an incentive to cut leverage fast — once below the threshold, excess cash can go to dividends, add-ons, or recap reserves instead of repayment.
Common pitfalls
- Modeling: the sweep % must not be hardcoded, it has to be an IF formula with leverage as the trigger
- The definition of "excess cash flow" varies contractually (often tighter than modeling CFADR)
- The step-down usually applies only at defined test dates (quarter-ends), not intra-period
Pitch tip
Question: "Why does the lender offer the step-down?"
Answer: "The lender wants cash capture while leverage is high and accepts room for the sponsor once de-levered — that's standard middle-market practice"