Cash Sweeps and Revolvers: How They Interact in LBO and Corporate Models

Cash Sweeps vs Revolvers: Modeling Without Loops

A revolver is a committed credit line you can draw, repay, and draw again to smooth working capital and support letters of credit. A cash sweep sends a defined share of excess cash flow to pay down term loans under a preset waterfall. In models, they share the same cash grid, so you must decide – every period – who gets the dollar first.

This guide shows how to define the rules, set the waterfall, and encode the logic so you avoid funding loops, false covenant triggers, and liquidity traps while preserving flexibility.

Why conflicts arise and how to fix them

Cash sweeps and revolvers solve different jobs. One accelerates deleveraging when free cash piles up. The other keeps the lights on between receivables and payables. When they collide on paper, you get circular funding and needless covenant noise. The fix is simple to state but hard to execute: tighten definitions, control accounts, and make the waterfall in your documentation match the waterfall in your model.

Define the tools before you model them

You cannot code what you cannot define. Before building the grid, agree on how the revolver, sweep, and variants work in your deal.

Revolver (RCF): A committed facility for seasonal swings and letters of credit. Many sponsor RCFs include a springing financial covenant that turns on when usage crosses a share of commitments or a dollar threshold.
Cash sweep (ECF): In sponsor finance, the Excess Cash Flow sweep mandates prepayment of term loans using a percentage of ECF for a period. This is distinct from daily sweeps in ABL that automatically apply receipts to the ABL balance under cash dominion.
Common variants: ECF runs annually or semi-annually with leverage-based step-downs. Some deals include anti-cash-hoarding language that requires using on-balance cash above a threshold to reduce the RCF while it is drawn.
Boundary: ECF sweeps live in senior secured term loans. Daily sweeps arise in ABL structures under lockboxes and deposit account control. Documents set priority across RCF, term loans, and any second lien or holdco debt.

Who wants what: lender and sponsor incentives

Understanding incentives helps you predict pressure points and draft clean rules.

RCF lenders: Prefer quick repayment of working capital borrowings and priority in mandatory prepayments when the RCF is drawn. They push for anti-hoarding and early visibility on cash leakage.
Term lenders: Want ECF to reduce principal when free cash exists, with limits on drawing the RCF to sidestep the sweep.
Sponsors: Value liquidity flexibility. They negotiate ECF definitions that net working capital swings, capex, permitted acquisitions, and voluntary prepayments, and they resist daily cash dominion except in stress.

Where debt sits dictates cash control

Legal location and security drive who controls cash and who benefits when a sweep triggers.

Entity location: Debt can sit at OpCo, HoldCo, or both. Location determines access to operating cash and sweep benefits.
Governing law: New York law dominates in the US, with English law common in Europe. ABL account control follows the deposit bank’s jurisdiction; UCC Article 9 “control” is central in the US.
Security and ring-fencing: ABL relies on lockboxes and DACAs for daily sweeps under dominion. Cash flow term loans share collateral but rely on ECF and covenants, not daily control.

How the sweeps actually work

Mechanics are the heart of both the documents and your model. Encode them as written.

ECF calculation: Start with EBITDA. Subtract cash taxes, interest paid, capex, permitted acquisitions or investments, and a working capital adjustment that nets non-cash timing effects. Apply the sweep percentage with leverage step-downs. Many agreements reduce the ECF base by voluntary prepayments made during the period.
ABL daily sweep: Under dominion, daily collections hit a concentration account and auto-reduce ABL borrowings. The borrower re-borrows to fund disbursements. Dominion “springs” on a default or when availability sits below a threshold for a set period, and switches off when availability recovers.

Waterfall design that avoids circularity

Set the prepayment waterfall to reflect priority and to prevent revolver-funded ECF.

ECF application: ECF typically prepays term loans first. RCF borrowings are often excluded unless outstanding at the sweep date. Letters of credit usually remain unaffected.
Pari application: When RCF borrowings are outstanding, many agreements require ratable application across pari senior debt. Drawing on the RCF to make ECF prepayments is typically prohibited.
Asset sale proceeds: Usually reduce the RCF first if drawn, then term loans, subject to reinvestment rights and baskets. In split-lien structures, the intercreditor agreement governs allocation.
ABL first-call: In ABL plus term loan structures, ABL has first claim on accounts and inventory proceeds. Under dominion, borrower cash rarely accumulates, so ECF shrinks in stress.

Interaction rules that stop funding loops

Well-drafted interaction rules prevent borrow-and-repay cycles and optics issues.

No revolver-funded ECF: Most documents forbid it, and the ECF definition often nets increases in RCF borrowings during the period.
Netting and minimum cash: Borrowers negotiate minimum cash cushions and ECF netting to avoid quarter-end liquidity traps. Anti-hoarding clauses require RCF reduction when cash exceeds a threshold while the RCF is drawn.
Step-downs and holidays: Leverage-based step-downs reduce the sweep as leverage falls. Some deals grant a temporary ECF holiday or a carry-forward credit when voluntary prepayments occur.

Paper that makes the rules stick

Documents, and the control they create, make or break your modeling assumptions.

Credit agreement: Defines facilities, covenants, and all prepayment mechanics, including ECF.
Security and guarantees: Set collateral scope, perfection, and any account control in non-ABL structures.
DACAs and cash management: Govern lockboxes, concentration accounts, and sweep mechanics in ABL.
Intercreditor agreement: Sets priority across ABL and term lenders, standstills, releases, and waterfalls.
Hedging agreements: If pari-secured, receive payments per the intercreditor waterfall. Margining can swing cash needs inside a period.

Fees and economics you should forecast

You should carry all fees and prepayment effects in the model and in your budget.

RCF cost: Upfront fees, commitment fees on undrawn amounts, LC participation and fronting fees, and utilization fees above a threshold.
ABL cost: Add lockbox and cash management fees plus DACA documentation costs.
ECF effect: ECF prepayments reduce interest expense and pull deleveraging forward. Watch call protection. Many documents exempt ECF from premiums, but some do not.

Accounting, classification, and reporting

Accounting treatments can change optics and covenant calculations.

Classification: Revolver borrowings are current if callable within 12 months. If the borrower can defer settlement for at least 12 months, noncurrent classification may be appropriate. Springing covenants can affect classification if likely to trigger within the look-forward window.
Issuance costs: Term loan costs offset the liability. Revolver costs are capitalized as assets. Amortize to interest expense over the term.
ECF payments: Treat as financing cash flows. Interest expense declines prospectively after prepayment.
Restricted cash: Under dominion, lender-controlled accounts may be restricted. Disclose lockbox mechanics and daily sweeps.
Reporting cadence: Track springing covenant compliance and availability monthly or quarterly. Provide 13-week cash flows, borrowing base certificates, and evidence of RCF availability when required.

Tax angles that influence sweep math

Tax rules can tilt the trade-off between faster deleveraging and flexibility.

Interest limitation: US 163(j) caps net business interest deductibility using EBIT. ECF can lower nondeductible interest but may pull forward debt cost amortization.
Withholding and cross-border: ECF prepayments reduce principal and rarely trigger withholding absent non-US lenders without treaty or gross-up coverage.
Transfer pricing: Align intercompany cash pools or internal revolvers with third-party terms to avoid adjustments.
Fee deductibility: Commitment and upfront fees are amortized. Early termination and accelerated prepayments may accelerate deductions depending on jurisdiction.

Compliance and operational controls

Set up compliance once, then run it as a checklist.

KYC and account control: Banks require KYC for entities with DACAs. Control notices must meet legal standards.
Beneficial ownership: Many US entities formed or registered after Jan 1, 2024 must report beneficial owners to FinCEN and keep records current.
Sanctions and AML: Lockbox and concentration flows are screened; lenders may block flagged transfers in real time.
Disclosure: Public issuers should disclose material covenant terms and minimum liquidity constraints, especially if RCF draws cluster at quarter-end.

Common failure modes and how to spot them

These pitfalls often show up in both documentation and models. Design around them early.

Liquidity trap: Heavy ECF plus anti-hoarding drains OpCo cash and forces early next-period RCF draws. Minimum cash and netting mitigate this.
Seasonality and ABL compression: Trough seasons can cut ABL availability and trigger dominion, which limits disbursement flexibility.
Intercreditor friction: Mixed-collateral sale proceeds need a precise waterfall to avoid close-date disputes.
Revolver-driven triggers: ECF reduces term debt but does not fix an availability or draw-based covenant if RCF usage stays elevated.
Anti-hoarding conflicts: Thresholds should respect minimum operating cash, payroll, taxes, and escrowed balances.
Draw-to-pay loop: Your model must net RCF changes in ECF and prohibit any implied loop.

Structural alternatives that reset the trade-off

When the base structure fights your business, consider these options.

RCF vs DDTL: A delayed-draw term loan provides committed term funding at milestones. It avoids anti-hoarding noise but is less flexible for daily liquidity.
Cash flow RCF vs ABL: ABL offers more revolver capacity for asset-rich borrowers with tighter controls and daily sweeps. Cash flow RCFs are lighter on collateral monitoring but rely more on covenants.
Unitranche plus super senior RCF: Use a small super senior RCF for working capital and LCs, with ECF prepaying the unitranche. Draft intercreditor language on ECF and asset sales with no ambiguity.

Implementation blueprint that actually works

Translate the rules into process and systems so operations match the model.

Facility design: Size the RCF, set LC sublimits, agree on the springing covenant, and align ECF percentages and step-downs with the base case deleveraging.
Cash management: Map operating accounts, lockboxes, and concentration accounts. Hard-code minimum cash and dominion triggers.
Intercreditor and collateral: Define priority collateral, ECF parceling, and asset sale allocation in plain terms.
Documentation: Finalize credit and security agreements, DACAs, cash management services, and targeted side letters on anti-hoarding and RCF carve-outs.
Modeling and covenants: Encode the ECF definition and waterfall. Test RCF usage in base, downside, and seasonal cases, and show no revolver churn from ECF or anti-hoarding.
Readiness: Execute DACAs, complete perfection steps, and dry-run daily sweeps if ABL. Confirm 13-week cash flow reporting and borrowing base systems work on day one.

Modeling must-haves to keep the grid clean

Build a disciplined cash grid and debt schedule so allocations are deterministic and auditable.

ECF timing: Calculate periodic ECF from actuals with only documented add-backs and deductions. Include leverage-linked step-downs.
Cash application: Apply available cash after minimum cash to ECF. Never draw the RCF for ECF. When required, apply ratably across pari debt outstanding.
Anti-hoarding logic: If cash exceeds the threshold while the RCF is drawn, reduce the RCF first. Exclude restricted cash and carve-outs.
ABL dominion: Under dominion, route receipts to reduce ABL daily. Fund disbursements via re-borrows. Keep operating cash near zero.
Waterfall sequence: Apply asset sale proceeds and ECF per the documents. Exclude LCs and track any LC cash collateral.
Springing covenant: Test only when the draw test is met, then re-test at the stated cadence.

As a practical shortcut, add a one-line rule of thumb in your control sheet: “If RCF is drawn and unrestricted cash exceeds threshold, repay RCF down to the threshold-cap; else, apply surplus per ECF waterfall on the sweep date.” This single test removes most loops.

Governance that keeps lenders calm

Governance converts a good model into smooth execution under real-world stress.

Weekly liquidity reviews: Track availability, borrowing base headroom, and springing triggers. Align capex and vendor terms with facility capacity.
Treasury playbook: Prepare notice templates and switchover steps for dominion and prepayments. Keep bank and legal contacts current.
Board reporting: Show revolver usage, sweep payments, and covenant headroom. Explain any shifts in commitments or LC usage that alter springing tests.
Records and audit: Archive models and document versions with index and audit logs. Hash released versions and apply retention policies, with holds as needed.

Market context: why this matters now

Revolvers remain the first defense for liquidity. Issuers with robust liquidity tend to keep revolvers undrawn or modestly used. Extended heavy draws often align with weaker profiles. Interest deductibility tightened under EBIT-based 163(j), and higher floating rates magnify the constraint. ECF helps by cutting principal faster, but tax planning should weigh any accelerated amortization of debt costs. Beneficial ownership reporting for newer US entities is live, and lenders have added covenants around it.

Negotiation levers that protect liquidity

Calibrate these levers up front to preserve flexibility without spooking lenders.

ECF netting and step-downs: Net working capital swings, add capex flexibility, and set step-downs at leverage levels you can meet. Consider a short reinvestment holiday.
Anti-hoarding: Define minimum cash and carve-outs for payroll, taxes, escrow balances, and controlled foreign corporation cash. Exclude restricted cash.
Springing covenant: Trigger as a share of commitments with a dollar floor so a commitment cut does not spring the covenant at a trivial draw.
ABL dominion: Negotiate higher availability thresholds, short cure periods, and a clean off-switch once availability recovers.
Intercreditor clarity: Lock down asset sale and ECF waterfalls. If the RCF should be excluded from ECF applications unless drawn, write it clearly.
Call protection carve-outs: Exempt ECF prepayments from premiums where possible.

Worked month-end example

Assume ECF of 20, cash of 35, minimum cash of 10, RCF draw of 15, and an anti-hoarding threshold of 20. First, reduce RCF by 15 to bring cash to 20 and RCF to 0. Then apply ECF of 20 to the term loan on the sweep date. There is no draw-to-pay loop, minimum cash is protected, and lender optics are clean. Encoding this sequence in the model removes ambiguity for auditors and lenders.

For more on how to structure your cash and debt scheduling in financial modeling, see additional templates and tips. If your capital structure includes ABL, review best practices for borrowing base calculations and reserves. Multi-tranche deals also benefit from clear drafting around intercreditor agreements and lien subordination.

Conclusion

Cash sweeps and revolvers can work together if the documents and the model tell the same story. Define ECF tightly, bar circularity, protect minimum cash, and set a waterfall that holds up under stress. Then run the business so the revolver stays what it should be: a backstop, not a habit.

Related reading: build a robust debt schedule, model working capital schedules, link the indirect cash flow statement, construct an LBO case, and pressure-test assumptions in a full three-statement model. For metrics that matter, review debt financing metrics.