The European second-lien lending market is young and still developing. Only recently has there been a rise of second-lien lending in a European market traditionally dominated by senior lenders and in which mezzanine lending is well developed. Market terms of European second-lien lending do not exist yet, but European second-lien lending so far could be characterized as cheap mezz. From a borrower's perspective, second-lien lending is cheaper than mezzanine lending, because the interest rate is much lower, but the rights afforded to second-lien lenders closely resemble those afforded to mezzanine lenders. In the European market, where there continues to be an abundance of liquidity, it could be argued that the risk attached to second-lien lending offered is undervalued. This poses the question of what will happen if the new European second-lien structures are tested in a down cycle.
From a workout and insolvency perspective, two differences between the US and...