Welcome to Wall Street Prep! Use code at checkout for 15% off.
Wharton & Wall Street Prep Certificates
Now Enrolling for September 2024 for September 2024
Private EquityReal Estate Investing
Buy-Side InvestingFP&A
Wharton & Wall Street Prep Certificates:
Enrollment for September 2024 is Open
Wall Street Prep

Mandatory Debt Amortization

Step-by-Step Guide to Understanding Mandatory Debt Amortization

Last Updated May 24, 2024

Learn Online Now

Mandatory Debt Amortization

How to Calculate Debt Amortization

Risk-averse lenders can attach provisions requiring scheduled repayments of principal as part of the lending agreement.

For the borrower, the amortization of debt represents a required legal obligation to pay down debt, as opposed to a discretionary decision.

  • Senior Debt Lenders: Senior debt lenders are far more likely to request some amount of mandatory amortization throughout the lending period as additional downside protection. Compared to high-yield investors, senior lenders tend to be more conservative by prioritizing capital preservation rather than chasing higher returns.
  • High-Yield Debt Investors: If the debt principal is paid down, the interest expense – the fees associated with debt financing and a source of returns for lenders – also becomes lower. Therefore, high-yield debt investors, which are returns-oriented, are unlikely to require mandatory debt amortization.

The amount of mandatory debt amortization due is tied to the original debt principal – i.e. the required amortization (%) is multiplied by the original principal amount on the initial lending date.

In Excel, the purpose behind the “MIN” function is to ensure the debt balance never falls below zero, as a negative figure would imply the borrower paid off more than it initially borrowed.

Each lender will have a different risk tolerance, so the required amortization percentage varies based on which type of lender is providing the funding (e.g. corporate bank, institutional investor).

Additionally, the credit profile of the borrower can also contribute towards the required amortization, as lenders are more likely to require a higher percentage of amortization for higher-risk borrowers (and vice versa).

Debt Amortization Calculator

We’ll now move on to a modeling exercise, which you can access by filling out the form below.


Excel Template | File Download Form

By submitting this form, you consent to receive email from Wall Street Prep and agree to our terms of use and privacy policy.


Mandatory Debt Amortization Calculation Example

First, we’ll begin by listing the assumptions for our model.

In our simple example, there is just one tranche of debt: Term Loan A (TLA).

The term loan A has a tenor – i.e. the length of the borrowing arrangement – of 5 years.

  • Beginning Balance (Year 1) = $200 million
  • Mandatory Amortization = 20.0%
  • Interest Rate = LIBOR + 200 bps

Using the first two assumptions, we can calculate the annual mandatory amortization amount by multiplying the 20.0% of mandatory amortization by the original principal amount, which comes out to $40 million per year.

The formula for calculating the mandatory amortization can be found below – note the inclusion of the “MIN” function to prevent the ending balance from falling below zero.

Mandatory Amortization Excel Formula

From Year 1 to Year 5, the borrower will pay $40m in equal installments of mandatory amortization.

Given the 5-year term of the debt, the ending TLA balance in Year 5 should be zero, as our model confirms.

Regardless of the fact that the ending balance is decreasing over time, the mandatory amortization is always calculated off the original principal amount (i.e. the $200m).

The interest expense, however, declined from $11m in Year 1 to $1m in Year 5 as a result of the gradual paydown in the principal.

While not applicable to our example, if there were any outstanding principal remaining at the end of the lending term, the balance is required to be paid entirely in one lump sum payment (i.e. a “bullet” repayment).

Ultimately, mandatory amortization for lenders is about finding the right balance between risk and return.

Mandatory Amortization Output

Master LBO Modeling Our Advanced LBO Modeling course will teach you how to build a comprehensive LBO model and give you the confidence to ace the finance interview.
Learn More
Inline Feedbacks
View all comments

The Wall Street Prep Quicklesson Series

7 Free Financial Modeling Lessons

Get instant access to video lessons taught by experienced investment bankers. Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts.