Module IV· Cash SweepIntermediate
Question
Why does the cash sweep typically repay senior debt first and not mezzanine?
Answer
Mechanics
The repayment order follows the contractual subordination hierarchy:
- RCF (if drawn)
- Senior Term Loan A (highest position)
- Senior Term Loan B
- Second Lien (if present)
- Mezzanine
- Shareholder Loan / Holdco PIK
Deep diveShow more details
Consequence
Senior lenders have the first claim — they contractually require excess cash to flow to them first, because:
- Lowest coupon (typically SOFR + 350-450bps): the least margin
- Highest security (first lien): earns the smallest risk premium
- Shortest maturity: meant to be repaid quickly
Comparison
| Tranche | Typ. coupon | Sweep priority |
|---|---|---|
| Senior TLB | SOFR + 400 | first |
| Second Lien | SOFR + 700-900 | second |
| Mezzanine | 12-15% (cash + PIK) | third |
| Shareholder Loan | 10-12% PIK | last (often no sweep) |
Common pitfalls
Mezzanine lenders often want a "make-whole clause" on early repayment — they lose the PIK accretion. So sponsors rarely repay mezz voluntarily before maturity.
Pitch tip
Question: "Would you ever repay mezz before senior?"
Answer: "Only once senior is already repaid. Mezz has high coupons, but the make-whole on early repayment makes it economically unattractive"