Debt Schedules and Cash Sweeps in LBO Interviews

The debt schedule is where LBO models stop being a valuation story and become a credit story. Interviewers ask about cash sweeps, mandatory amortization, and revolver mechanics to see whether you understand how free cash flow actually deleverages the company. If you only memorize "debt goes down over time," you will blank when they change sweep percentage or minimum cash.

What a debt schedule has to track

For each tranche, every period:

1. Beginning balance
2. Draws
3. Mandatory amortization
4. Optional prepayments (sweep)
5. Interest (cash and/or PIK)
6. Ending balance

Ending = Beginning + Draws − Mandatory − Optional + PIK (if toggled)

Typical tranche stack (simplified)

You do not need every market nuance. You need payment priority intuition and which balances shrink when FCF is strong.

Mandatory vs optional paydown

Mandatory amortization: contractual principal paydown (for example 5% of initial term loan per year). Happens even if you would rather keep cash.

Optional prepay / cash sweep: extra principal paydown from excess cash flow after running the business and meeting minimum cash.

Cash sweep mechanics (interview version)

A common teaching flow each year:

If excess cash is zero, optional prepay is zero. That single sentence saves people from inventing paydown.

Revolver intuition

The revolver is a credit card with a limit:

• Draw when cash would otherwise breach minimum cash
• Repay when excess cash exists
• Interest accrues on drawn amounts

In a healthy LBO case, the revolver may be undrawn most years after close. In a stressed case, it becomes the shock absorber.

Interest: cash vs PIK

Cash interest leaves the company via cash.
PIK interest accrues into principal (balance rises).

PIK can help near-term cash and hurt later leverage. If a prompt includes PIK mezz, ending balances can grow even when senior debt amortizes.

Why sweeps change returns

More sweep → faster deleveraging → lower ending debt → higher exit equity → higher MoIC/IRR (all else equal), but less cash retained on the balance sheet. Credit agreements and sponsor preferences set the sweep percentage. Interviewers may ask you to sensitize 50% vs 100% sweep.

Be precise: if you keep cash instead of sweeping, net debt can still improve. Many interview models assume sweeps because sponsors want deleveraging.

Common traps

Interview prompts

"Walk me through the debt schedule."
"For each tranche I track beginning balance, draws, mandatory amort, optional sweep, interest, and ending balance. Excess cash after minimum cash prepays debt in seniority order."

"What is a cash sweep?"
"Contractual or modeled use of excess free cash flow to optionally prepay debt after mandatory payments and minimum cash."

"Revolver vs term loan?"
"Revolver is flexible capacity you draw and repay. Term loan is funded debt with amort and maturity profile."

Practice drills

1. Paper schedule for one term loan: 5% amort, $50 FCF, 100% sweep, $10 min cash
2. Add a revolver with a $20 beginning draw and show repayment order
3. Toggle sweep 0% / 50% / 100% and explain returns impact
4. Add PIK mezz and show why ending total debt may not fall every year

Practice on SheetRank

Build LBOs where debt balances are graded outputs, not decorations. When paydown is wrong, returns are wrong. Apollo-style cases make that painful in a useful way.