Cash sweep

A cash sweep is a financing feature under which excess cash generated by a project, or a stated portion of that excess, is applied to repayment of principal rather than distributed to equity holders. The CFA Institute infrastructure-debt research report defines cash sweeps in those terms and notes that, in mature operational projects, such provisions are often embedded in financing agreements to accelerate debt repayment, provide lenders with greater downside protection, and can reduce overall financing costs over time.

Cash sweep use on bank PF and CRE desks

On project finance and leveraged CRE desks the sweep sits in the cash waterfall after scheduled senior debt service and required reserve funding, and before or in place of equity distributions. AFME's project-finance discussion paper describes the broader control package that makes sweeps enforceable: cash flows are applied first to operating and supply costs, then to debt service, then to funding of any debt service reserve account (DSRA) and maintenance reserves, and only then to the distribution account, so cash cannot leak before lender priorities are met.

Sweeps are used to de-lever faster after strong periods, to harden mini-perm or soft-maturity structures when refinancing has not occurred, and to respond to covenant stress by converting trapped cash into prepayment. CRE facilities use analogous excess-cash prepayment clauses on net cash flow after debt service and reserves.

Mechanics and triggers

Facility documents usually define:

• the surplus-cash definition after permitted operating costs, taxes, scheduled debt service and reserve top-ups
• the sweep percentage (full or partial sharing with equity)
• the trigger (always-on during a period, DSCR or lock-up breach, failed refinance by a soft maturity, or other events)
• application order across tranches and the effect on future interest and amortisation

Because swept amounts are prepayments rather than scheduled debt service, they typically do not enter the DSCR denominator. They do reduce outstanding principal and therefore can improve subsequent LLCR and leverage metrics. A cash sweep is an additional contractual use of surplus cash after the waterfall's operating-cost and debt-service priorities are met, not a substitute for scheduled service.

Distinctions from lock-ups and reserves

A cash sweep prepays debt. A distribution lock-up or cash trap retains surplus cash in the borrower when coverage fails, without automatically reducing principal. A debt service reserve account holds a target liquidity buffer that may be drawn to meet scheduled service and later topped up. The three tools often operate together in the same waterfall, but they serve different credit functions.