Cash sweeps, LTV triggers and covenants in portfolio loans

Cash sweeps, loan-to-value triggers and covenants are the three mechanisms that govern how a loan secured on a private portfolio behaves between drawdown and repayment. The sweep decides how much of each distribution goes to the lender. The LTV trigger decides when the terms tighten. The covenants decide what counts as a breach and what happens next. A borrower who understands all three before signing can model the downside case; one who reads only the headline advance rate and margin cannot.

The three mechanisms

A cash sweep directs an agreed share of distributions from the collateral portfolio to the lender, either to pay interest and amortise principal or into a blocked account. The Family Office Association's October 2026 paper on NAV credit facilities notes that in many structures the sweep starts at closing while the loan is performing, and recommends modelling the sweep on its own before modelling any breach.

An LTV trigger is a threshold above the initial advance rate at which the lender's rights change. Typical consequences are a higher sweep percentage, a stop on further draws or releases, and the start of a cure period. A second, higher threshold is usually an event of default. Because LTV is outstanding debt divided by eligible value, it rises when marks fall, when interest capitalises, and when positions are excluded from eligibility.

Covenants include the LTV tests, concentration limits, reporting obligations, restrictions on new commitments and transfers, and the lender's right to contest valuations or appoint an independent valuer. Cure rights usually allow the borrower to repay part of the loan or add collateral within a set period.

A worked example

The following is illustrative and constructed for this article. It does not describe any lender's terms.

A family holding company owns a portfolio with an eligible value of $200m and borrows $40m, an opening LTV of 20%. The facility carries a 30% LTV trigger and a 40% hard limit. Interest is 10% a year, paid in kind. The sweep is 50% of net distributions while LTV is below the trigger and 100% above it. The portfolio distributes $20m a year in the base case.

The base case is benign: distributions of $20m with a 50% sweep repay $10m a year and the LTV falls. In the downside the damage comes from two directions at once, since capitalised interest raises the numerator while the markdown cuts the denominator. A 35% markdown with no distributions moves LTV from 20% to 33.8% in a year, and even a 25% markdown reaches 29.3%, a fraction below the trigger. Once the sweep goes to 100% the family receives nothing from the portfolio, so any capital calls on the same funds must be met from cash held outside the facility.

In this example the family's unfunded commitments are the hidden variable. If they total $15m over the two years and distributions have stopped, the office needs $15m of external liquidity at the same time as it may be asked to cure a breach. The article on preparing to borrow treats this as the central test.

What a borrower should negotiate

Rede Partners' 2026 NAV Financing Report found margins converging around 4% to 7%, which leaves less room to negotiate on price than on structure.

On the sweep, the borrower should seek a lower percentage while the loan performs, carve-outs for capital calls on the collateral funds, for taxes and for the vehicle's running costs, and a clear switch-off once LTV falls back below a reset level. On the trigger, the gap between the opening LTV and the trigger is the buffer against markdowns, and a borrower drawing at 20% with a 30% trigger has far more room than one drawing at 28%. On cure, the length of the period, whether partial repayment counts, and whether adding collateral is permitted all determine whether a breach is survivable.

On eligible value, the borrower should understand every exclusion and haircut, how often the lender re-tests, whether capitalised interest counts in the debt figure, and what happens between reporting dates if the lender disputes a mark. On the covenants that restrict behaviour, limits on new commitments and on transfers should be checked against the office's own plans, since a facility that prevents a planned secondary sale or a new fund commitment can be more costly than its interest.

Finally, the borrower should settle governance before drawing. The NAV loans explainer describes who typically holds these facilities; who in the family can authorise a cure payment, add collateral or approve a sale, and how quickly, should be written down before the first quarter in which the question arises. A borrower who also has to rebalance an illiquid portfolio under a sweep will find both tasks compete for the same cash.

The mechanics interact, and the only reliable way to see how is to build the table above for the family's own numbers before signing.