A loan agreement has an excess cash flow (ECF) sweep of 75% for the first two years and 50% thereafter, with a leverage-based step-down to 0% if leverage falls below 2.5x. The company generates EBITDA of $200M, capex $30M, cash taxes $20M, and cash interest $40M. Mandatory amortization is 1% per annum on $400M term loan. What is the ECF and the required prepayment? If the company has $50M of discretionary capex, how does it affect the result?
AdvancedModel answer
ECF typically defined as EBITDA minus cash taxes, cash interest, capex, and mandatory amortization. ECF = $200M - $20M - $40M - $30M - (1%×$400M=$4M) = $106M. First two years sweep = 75%, so prepayment = $79.5M. If the company made $50M of discretionary capex (e.g., growth capex), some definitions allow it to be deducted or added to a carryover basket, potentially reducing ECF to $200M - $20M - $40M - $80M - $4M = $56M, with a 75% sweep = $42M. The exact treatment depends on whether the credit agreement carves out growth capex from ECF deductions, often limited to a percentage of beginning PP&E or via a builder basket. Follow-up pressure: (1) If the company’s leverage ratio drops to 2.3x after the sweep, explain what happens to the sweep percentage in the following year. (2) How does a springing maturity date impact the priority of ECF sweeps? (3) The sponsor wants to pay a dividend; can they avoid the sweep by classifying cash as “operational” and not “excess”? What would the loan agreement typically say?
This is an advanced Superday-level question with a full model answer, part of IB Atlas's practice bank.
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