Cash sweeps and cash traps: how lenders hold back cash

Where the cash goes in a normal month

Project-style financings pay cash out in a set order, the "waterfall": operating costs, fees, interest, scheduled principal, reserve top-ups and, last, distributions to the owner. Sweeps and traps both sit just above distributions. When they apply, the money that would have gone to the owner goes somewhere else.

Cash sweeps: the main types

1. Percentage-of-surplus sweep. A fixed share of excess cash flow goes to prepay the debt every period, whatever the performance. The Google-backstopped high-yield bonds issued by TeraWulf, Cipher and the TeraWulf/Fluidstack joint venture in 2025 each use a 50% excess cash flow sweep; the TeraWulf indenture defines the "Applicable ECF Percentage" as fifty percent.

2. Event-driven sweep. Cash is swept only after something happens: a covenant test failing, a customer contract ending or the borrower missing a target. In data centre ABS, the Vantage Cardiff deal applies a "Class A LTV Test Sweep Amount" to repay notes if the Class A loan-to-value test is breached.

3. Scheduled amortisation instead of a sweep. Some deals get the same deleveraging through fixed instalments. Core Scientific's 7.75% notes, secured on campuses leased to CoreWeave, repay in semi-annual instalments equal to 11.5% a year of the original principal. The owner knows the schedule in advance, which suits equity investors better than a variable sweep.

Cash traps: the early warning

A cash trap does not repay anything. It moves surplus cash into a locked account, where it stays until either performance recovers (and the cash is released to the owner) or things get worse (and the cash is used to repay debt).

Public GPU loans show trap levels clustering just above the default level:

CoreWeave's DDTL 5.0 is a reminder that the trigger does not have to be a ratio. A trap that springs on a material customer contract breach catches a problem before it shows up in the numbers.

In data centre ABS, traps sit higher because the deals are sized more conservatively and the trap is the first line of defence for long-dated investment-grade notes. See ABS triggers for the full ladder.

When a trap turns into a sweep

Most structures put a time limit on a trap. If the trap lasts too long, the trapped cash and future surplus go to repay debt.

• Compass Datacenters ABS: principal becomes payable if a Cash Trap Condition continues for more than six consecutive calendar months.
• Vantage Cardiff ABS: principal becomes payable if a Cash Trap Event continues for more than nine consecutive calendar months.
• IREN Hardware 3: trapped cash goes to prepayment after six months.

This step from trap to sweep is one of the most negotiated points in a term sheet. Sponsors want a long period to recover; lenders want a short one.

How traps are released

A trap usually ends when the test is passed again for a set number of periods. Compass, for example, ends its Cash Trap Condition only when the relevant class DSCRs are met on the last day of the same three consecutive months. Centersquare and STACK need the three-month average DSCR to pass on two consecutive month-ends. IREN's Hardware 3 trap ends on the first later test date at or above 1.10x. Check also whether equity cures count: in IREN's Hardware 3 documents, cure equity does not count towards the DSCR for deciding whether a cash trap event has occurred, although it can be used to make payments and prepay debt.

What to check in a term sheet

1. Is the trap tested on historical or projected DSCR, and over what period?
2. Are there non-financial triggers, such as customer contract breach or loss of a key tenant?
3. How long can a trap last before cash is swept?
4. What does it take to release trapped cash, and can equity cure it?
5. Is the sweep a percentage, a full sweep or event-driven, and does it carry a prepayment fee?