Which type of debt is typically NOT repaid by the cash sweep?
Subordinated and PIK debt are typically exempt from the cash sweep — only senior tranches are actively swept.
| Debt type | Swept? |
|---|---|
| Senior Term Loan / TLB | swept |
| Second Lien | after senior |
| Mezzanine | usually NOT |
| Shareholder Loan / PIK | NEVER |
| Holdco PIK Notes | NEVER |
| Vendor Loan | usually NOT |
Why? Mezzanine often carries a soft-call premium on early repayment — the sponsor loses money repaying it before maturity. PIK and shareholder loans belong to the sponsor itself — no lender pressure.
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- The senior lender has the strongest interest in cash capture and therefore requires the sweep in the credit agreement.
- Second lien is often only swept after a complete senior pay-down.
- Mezzanine accretes over the hold period and is typically repaid only at exit: either from sale proceeds or through refinancing by the new sponsor.
- Holdco PIK notes are structurally removed from OpCo cash flow: the sweep at the OpCo level cannot reach them.
Junior modelers build the sweep against every tranche — wrong. Mezzanine typically has a soft-call schedule with 102/101/100 pricing over 3 years — on early repayment the soft-call premium bites, costing the sponsor more than the coupon saved. (A true make-whole premium = the NPV of the remaining coupons typically applies only during a non-call period.)
Question: "Why doesn't the sponsor repay the mezzanine voluntarily?"
Answer: "The soft-call premium makes it uneconomic. The 12–15% mezz coupon looks expensive, but the PIK tax shield partly offsets it. The sponsor waits for the exit or a refi opportunity at par"