Second Lien Loan - Second Lien and First Lien Secured Loans

Second Lien and First Lien Secured Loans

In the event of a bankruptcy or liquidation, the assets used by the company as security would first be provided to the first lien secured lenders as repayment of their borrowings. To the extent that the value of the assets is sufficient to satisfy the company's obligations to the first lien secured lenders, any additional proceeds from the sale of the pledged assets would then be made available to the second lien lenders as repayment of the second lien loan.

With almost no exceptions, a borrower will take a second lien loan either at the same time or after taking a traditional first lien secured loan and the secured lenders will place limitations on the borrower's ability to pledge its assets or borrow additional secured debt.

The specific rights of the first lien and second lien lenders are established in the credit agreements between the borrower and each class of lender as well as in an intercreditor agreement. As the name implies, an intercreditor agreement is a contract between multiple classes of lenders where each class of lender agrees to specific procedures and preferences in the event of a bankruptcy or liquidation. Secured lenders will routinely require an intercreditor agreement to protect their interests before allowing a borrower to obtain a second lien loan.