Objectives
Section Learning Objectives
3.1
Types of Principal Payments
📖
Key Distinction
Mandatory Payments (Amortization): Required by loan agreement, must be paid
Optional Payments (Prepayments): Discretionary, paid when excess cash is available
🔴 Mandatory Amortization
- Required by loan agreement
- Typically 5-20% per year for term loans
- Not optional - must be paid
- Bonds typically have 0% amortization
🟢 Optional Prepayments
- Discretionary - paid when cash available
- Also called cash sweep
- Reduces future interest expense
- May have prepayment penalties
3.2
Building an Amortization Schedule
📝 Worked Example
Term Loan Amortization Schedule
Scenario: Reliance Retail secures a ₹500 Crore Term Loan Facility.
• Initial Principal: ₹500 Cr
• Mandatory Amortization: 10% of original principal per annum
• Interest Rate: 8% per annum applied to beginning balance
Question: Build the first 3 years of the amortization schedule.
• Initial Principal: ₹500 Cr
• Mandatory Amortization: 10% of original principal per annum
• Interest Rate: 8% per annum applied to beginning balance
Question: Build the first 3 years of the amortization schedule.
| Year | Beg Balance | Mandatory Amort | Interest @ 8% | Total Payment | End Balance |
|---|---|---|---|---|---|
| 0 | - | - | - | - | ₹500.0 Cr |
| 1 | ₹500.0 Cr | (₹50.0 Cr) | (₹40.0 Cr) | (₹90.0 Cr) | ₹450.0 Cr |
| 2 | ₹450.0 Cr | (₹50.0 Cr) | (₹36.0 Cr) | (₹86.0 Cr) | ₹400.0 Cr |
| 3 | ₹400.0 Cr | (₹50.0 Cr) | (₹32.0 Cr) | (₹82.0 Cr) | ₹350.0 Cr |
| Years 4-10 | Continues until fully paid off... | ||||
Mandatory Amortization = Original Amount × Amortization %
Interest = Beginning Balance × Interest Rate
Ending Balance = Beginning Balance - Mandatory Amort
Interest = Beginning Balance × Interest Rate
Ending Balance = Beginning Balance - Mandatory Amort
⚠️
Important Note
Amortization percentages are typically based on ORIGINAL principal, not the current balance. A 10% amortization on a ₹500 Cr loan means ₹50 Cr per year, regardless of the current balance.
3.3
Cash Sweep Mechanics
💧 The Cash Flow Waterfall
Excess cash flows to debt in order of priority
Excess Cash
After operations & mandatory payments
→
After operations & mandatory payments
Revolver
Highest cost, most flexible
→
Highest cost, most flexible
Term Loan B
Higher cost than TLA
→
Higher cost than TLA
Term Loan A
Lower cost, senior
Lower cost, senior
🔧 Excel Formulas for Cash Sweep
Step 1: Calculate Cash Available for Sweep
Cash_Available = MAX(0, Cash_from_Operations - Min_Cash_Balance - Mandatory_Amort)
Step 2: Sweep to First Debt (Cash Credit / Revolver)
Revolver_Prepay = MIN(Cash_Available, Revolver_Balance) Remaining_Cash = Cash_Available - Revolver_Prepay
Step 3: Sweep to Second Debt (Term Loan B)
TLB_Prepay = MIN(Remaining_Cash, TLB_Balance) Remaining_Cash = Remaining_Cash - TLB_Prepay
Step 4: Continue to Next Debt...
Cash_Available = MAX(0, Cash_from_Operations - Min_Cash_Balance - Mandatory_Amort)
Step 2: Sweep to First Debt (Cash Credit / Revolver)
Revolver_Prepay = MIN(Cash_Available, Revolver_Balance) Remaining_Cash = Cash_Available - Revolver_Prepay
Step 3: Sweep to Second Debt (Term Loan B)
TLB_Prepay = MIN(Remaining_Cash, TLB_Balance) Remaining_Cash = Remaining_Cash - TLB_Prepay
Step 4: Continue to Next Debt...
📝 Worked Example
Executing a Cash Sweep Waterfall
Scenario: Vedanta Ltd. generates ₹900 Cr free cash flow this year. Their minimum cash requirement is ₹100 Cr. They have mandatory amortization on Term Loan A of ₹250 Cr. Excess cash will first sweep a Cash Credit facility (₹150 Cr outstanding) and then Term Loan B.
Question: Calculate the Cash Available for Sweep, the prepayments made, and the final Remaining Cash.
Question: Calculate the Cash Available for Sweep, the prepayments made, and the final Remaining Cash.
1
Calculate Cash Available for Sweep
Cash Available = FCF - Min Cash - Mandatory Amort
Cash Available = ₹900 Cr - ₹100 Cr - ₹250 Cr = ₹550 Crore
Cash Available = ₹900 Cr - ₹100 Cr - ₹250 Cr = ₹550 Crore
2
Sweep to First Priority: Cash Credit Facility
Prepay Cash Credit = MIN(Cash Available, Cash Credit Balance)
Prepay = MIN(₹550 Cr, ₹150 Cr) = ₹150 Crore
Remaining Cash = ₹550 Cr - ₹150 Cr = ₹400 Crore
Prepay = MIN(₹550 Cr, ₹150 Cr) = ₹150 Crore
Remaining Cash = ₹550 Cr - ₹150 Cr = ₹400 Crore
3
Sweep to Second Priority: Term Loan B
Prepay Term Loan B = Remaining Cash (since we have no limit given, all of it drops down)
Prepay = ₹400 Crore
Remaining Cash = ₹400 Cr - ₹400 Cr = ₹0
Term Loan B is prepaid by ₹400 Cr.
Prepay = ₹400 Crore
Remaining Cash = ₹400 Cr - ₹400 Cr = ₹0
Cash Sweep Formula (All-in-One):
=MIN(Available_Cash, MAX(0, Beginning_Balance - Mandatory_Amort))
=MIN(Available_Cash, MAX(0, Beginning_Balance - Mandatory_Amort))
💡
Why Sweep Highest Cost Debt First?
Paying down the highest cost debt first maximizes interest savings. If a Cash Credit facility costs 10% and Term Loan A costs 8%, prepaying ₹100 Cr to the CC facility saves ₹10 Cr/year vs ₹8 Cr for Term Loan A.
3.4
Revolver Draw / Paydown Logic
🔄 Revolver: The Balancing Item
The revolver funds shortfalls or absorbs excess cash
📉 When Cash is Short
If ending cash < minimum cash:
Draw Revolver = Min Cash - Available Cash
=MAX(0, Min_Cash - Cash_Before_Revolver)
=MAX(0, Min_Cash - Cash_Before_Revolver)
📈 When Cash is Excess
If ending cash > minimum cash:
Paydown Revolver = MIN(Excess, Revolver Balance)
=MIN(Cash_Excess, Revolver_Balance)
=MIN(Cash_Excess, Revolver_Balance)
📝 Worked Example
Cash Credit (Revolver) Balancing Act
Scenario: Indian Hotels Company Ltd. requires a ₹100 Cr Minimum Cash Balance. We are provided with the cash generated before the Cash Credit (Revolver) draw/paydown for 3 consecutive years.
• Minimum Cash Required: ₹100 Cr
• Initial Cash Credit Balance (Y0 End): ₹200 Cr
• Cash Before Revolver: Y1 = ₹50 Cr, Y2 = ₹250 Cr, Y3 = ₹180 Cr
Question: Build the Cash Credit Schedule (Beginning Balance, Draw/Paydown, Ending Balance) for all 3 years.
• Minimum Cash Required: ₹100 Cr
• Initial Cash Credit Balance (Y0 End): ₹200 Cr
• Cash Before Revolver: Y1 = ₹50 Cr, Y2 = ₹250 Cr, Y3 = ₹180 Cr
Question: Build the Cash Credit Schedule (Beginning Balance, Draw/Paydown, Ending Balance) for all 3 years.
| Item | Year 1 | Year 2 | Year 3 |
|---|---|---|---|
| Beginning Cash Credit | ₹200.0 Cr | ₹250.0 Cr | ₹100.0 Cr |
| Cash Before Revolver | ₹50.0 Cr | ₹250.0 Cr | ₹180.0 Cr |
| Minimum Cash Required | ₹100.0 Cr | ₹100.0 Cr | ₹100.0 Cr |
| Cash (Shortage) / Excess | (₹50.0 Cr) | ₹150.0 Cr | ₹80.0 Cr |
| Draw / (Paydown) | ₹50.0 Cr | (₹150.0 Cr) | (₹80.0 Cr) |
| Ending Cash Credit | ₹250.0 Cr | ₹100.0 Cr | ₹20.0 Cr |
Revolver Draw Formula:
=MAX(0, Min_Cash - Cash_Before_Revolver)
Revolver Paydown Formula:
=MIN(MAX(0, Cash_Before_Revolver - Min_Cash), Beg_Revolver_Balance)
Combined Formula (Draw as positive, Paydown as negative):
=IF(Cash_Before_Revolver < Min_Cash,
Min_Cash - Cash_Before_Revolver,
-MIN(Cash_Before_Revolver - Min_Cash, Beg_Revolver_Balance))
3.5
Debt Capacity & Covenants
🛡️ Key Debt Covenants to Monitor
Leverage Ratio
Debt / EBITDA ≤ 4.0x
If EBITDA = ₹500 Cr:
Max Debt = ₹500 Cr × 4.0 = ₹2,000 Cr
If EBITDA = ₹500 Cr:
Max Debt = ₹500 Cr × 4.0 = ₹2,000 Cr
Interest Coverage
EBITDA / Interest Expense ≥ 3.0x
If EBITDA = ₹500 Cr:
Max Interest = ₹500 Cr / 3.0 = ₹166.7 Cr
If EBITDA = ₹500 Cr:
Max Interest = ₹500 Cr / 3.0 = ₹166.7 Cr
⚠️
Covenant Headroom
Always model covenant compliance checks:
• Calculate actual ratio vs. covenant limit
• Flag warnings when approaching limits (e.g., within 10%)
• Model scenarios to test covenant sensitivity
• Covenant breach can trigger default and accelerated repayment
Summary
Key Takeaways
- Mandatory amortization is required; optional prepayments are discretionary
- Cash sweep pays down debt with excess cash, highest cost first
- Revolver acts as the balancing item - draws when short, pays down when excess
- Covenants limit debt capacity and must be monitored
- Use MIN and MAX functions to handle sweep and revolver logic