The lending view

Author: | Published: 1 Apr 2007
Second lien lenders need to make sure no one above them in the waterfall receives better information

Second lien term loan financings remain a popular source of capital in the institutional markets, but recent exposure to bankruptcy has put a spotlight on the risk of these structures.

In a nutshell, in a second lien financing, second lien lenders obtain a junior lien on collateral that also secures the first lien debt. The first lien lenders customarily require the second lien lenders to waive a number of rights they would otherwise hold as junior lien creditors. The goal of the first lien lenders is to ensure that they control key decisions relating to the shared collateral, particularly decisions concerning the exercise of remedies against that collateral – at least for a period of time. Although these restrictions may tie the hands of the second lien lenders somewhat in their dealings with...