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GLOSSARYTERMS AS A CREDIT DESK USES THEM

Distribution lock-up

What is a distribution lock-up, and when does cash get trapped in the business?

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BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED

// THE SHORT ANSWER

A distribution lock-up stops a borrower paying dividends, repaying shareholder loans or making other distributions when a test is failed, usually a cover ratio set above the default level, or while a reserve account is short or a default is continuing. The cash stays in the business or in a blocked account until the test is passed again, and some agreements apply it to prepayment if the lock-up lasts. Common in project and infrastructure finance, it gives the lender an early lever: the owners stop receiving cash before the loan is in default.

BASIS  Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

// WHAT IT IS NOT

A cash sweep sends surplus cash to repaying the loan; a lock-up only stops it leaving to the owners, and the two are often used together.

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