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GLOSSARYTERMS AS A CREDIT DESK USES THEM

Mandatory prepayment

What is a mandatory prepayment, and what events trigger one?

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BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED

// THE SHORT ANSWER

A mandatory prepayment is an obligation in a facility agreement to repay part or all of the loan early when specified events occur, most often the sale of an asset, an insurance payout, the raising of new debt or equity, or a change of control. It keeps the loan tied to the value it was lent against: if a borrower sells a property for US$3m, the agreement may require the net proceeds to reduce the loan rather than fund something else. Agreements usually allow exceptions, such as small disposals or proceeds reinvested within a set period, and those exceptions are where the negotiation happens.

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 is one kind of mandatory prepayment, taken from surplus cash flow; the others are triggered by events such as a sale or an insurance claim.

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