An excess cash flow recapture clause requires a borrower to use a portion of any additional cash flow generated beyond a specified threshold to make extra payments on the outstanding debt. This mechanism is designed to accelerate the repayment schedule and reduce overall interest costs for the borrower.
Excess cash flow recapture (“ECFR”) would be required only if Senior Funded Debt to EBITDA is > 2.50x at the time of measurement. ECFR to be defined as 50% of Earnings before Interest, Taxes, Depreciation, Amortization, less the sum of scheduled amortization of long-term debt, interest expense, and cash capital expenditures. ECFR payments would be made annually in conjunction with receipt of CPA audited financial statements. The payment would be applied to the principal balance of the Term Loan.
The loan agreement states that an excess cash flow recapture payment must be made equal to (a) 75% of the excess cash flow for the immediately preceding fiscal year in which indebtedness to consolidated EBITDA ratio is greater than or equal to 2.50:1.0; (b) 50% of the excess cash flow for the immediately preceding fiscal year in which the funded indebtedness to consolidated EBITDA Ratio is less than 2.50:1.0 but greater than or equal to 1.5:1.0; or (c) 0% of the excess cash flow for the immediately preceding fiscal year in which the funded indebtedness to consolidated EBITDA Ratio is less than 1.5:1.0. In addition, the Company must make additional mandatory prepayment of amounts outstanding based on proceeds received from asset sales and sales of certain equity securities or other indebtedness. DLH made a voluntary prepayment of term debt of $3.9 million in June 2019, which satisfies the next three quarterly principal installments.
Excess Cash Flow Recapture means that Borrower agrees to pay to Bank, commencing with the receipt of Borrower’s December 31, 2022 audit, seventy-five percent (75%) of Excess Cash Flow, which is measured and charged by Bank after receipt and review of the Borrower’s required annual audit, as prepayment of the outstanding principal of Term Loans with an elected amortization period in excess of five (5) years. Such payments shall be applied by Bank in the inverse order of maturity, but will not exceed, in the aggregate, twenty-nine percent (29%) of the original principal amount of any applicable Term Loan during its amortization period.
b.Excess Cash Flow. Beginning with the Fiscal Year ending March 31, 2021, within thirty (30) days after the earlier to occur of (x) the delivery of financial statements pursuant to Section 5.3(e) and (y) the date financial statements were required to be delivered pursuant to Section 5.3(e), Borrowers shall prepay an aggregate principal amount of the Loans equal to the excess (if any) of (A) the Excess Cash Flow Recapture Percentage of Excess Cash Flow for the Fiscal Year covered by such financial statements, less (B) the aggregate principal amount of the Term Loan optionally prepaid pursuant to Section 1.2(c) during the most recently completed Fiscal Year to which such financial statements refer, but only to the extent such prepayments are funded with internally generated cash flow (and not with the proceeds of any equity or debt financing).
Excess Cash Flow Recapture. On the ECF Payment Date of each year (if applicable), Borrower shall make an additional principal payment equal to fifty (50%) percent of the Excess Cash Flow (this additional payment will be applied to the most remote payment of principal due under this Agreement). Each such payment shall be accompanied by a certificate signed by Borrower’s chief financial officer certifying the manner in which Excess Cash Flow and the resulting payment, were calculated, which certificate shall be in form and substance acceptable to Bank.
Any amortization greater than five years will be subject to an excess cash flow recapture. The Amended Loan Agreement also allows us to enter into hedging contracts with M&T, including interest rate swap agreements, interest rate cap agreements, interest rate collar agreements, or any other agreements or that are designed to protect us against fluctuations in interest rates or currency exchange rates.
(g) Excess Cash Flow Recapture. After the end of each Fiscal Year, starting with the Fiscal Year ended December 31, 2020, the Borrower shall prepay the Obligations in an amount equal to the Applicable ECF Percentage of the Excess Cash Flow for such Fiscal Year; provided, that such prepayment shall be required only if the amount required to be prepaid for such Fiscal Year is greater than $4,000,000 (with only such excess amount being subject to prepayment). The Borrower shall make such payment on the date that is ten (10) days after the earlier of (i) the date on which the Borrower deliver their annual audited financial statements for such Fiscal Year to the Administrative Agent pursuant to Section 6.04(a) and (ii) the date on which the Borrower is required to deliver such financial statements pursuant to Section 6.04(a).
Excess Cash Flow Recapture is a clause found in some loan agreements and financial contracts. It dictates that if a borrower has cash flow that exceeds a certain threshold, they must use that excess to make additional payments on the principal of the loan. This provision ensures that lenders receive additional repayments, reducing the outstanding balance of the loan and minimizing their risk.
Excess Cash Flow Recapture should be utilized in loan agreements when:
Borrowers should be cautious, as such clauses can restrict their financial flexibility by obligating them to make unplanned repayments.
When writing an Excess Cash Flow Recapture clause, consider the following elements:
Define Excess Cash Flow: Clearly outline what constitutes “excess cash flow” for the purposes of the agreement, considering revenue, expenses, and any specific thresholds.
Specify Thresholds: Identify the cash flow threshold that triggers the recapture, ensuring both parties agree on what “excess” means.
Repayment Terms: Specify how the excess cash should be applied to the loan, including timing and amounts.
Reporting Requirements: Include any documentation or reporting the borrower must provide to demonstrate compliance with the clause.
Example:
“In the event that the Borrower’s annual net cash flow exceeds $X, said excess amount shall be applied towards the principal outstanding balance of the loan. The Borrower shall deliver quarterly reports to the Lender, detailing cash flow and confirming compliance.”
Excess Cash Flow Recapture clauses are typically included in:
Corporate Loan Agreements: Particularly in leveraged buyouts or acquisition financing where lenders seek additional security.
Structured Finance Deals: Where cash flow variability is a concern.
Debt Restructuring Agreements: When lenders want to ensure increased repayments from potential future cash flow improvements.
These contracts use such clauses to balance the interests of securing improved payment terms for the lender with the operational cash management for the borrower.
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