Should I assume 1st lien are generally revolver? Or should I consider them as TLA? How is it price? How is 2nd lien price? Should I assume any amort?
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Understanding you’re a prospect, but if you get a job in IB, youll likely look back at this question and chuckle.
Generally, you want to look at comps to determine pricing. And without any context, this is a tough question to answer. So for a precise answer, id look at LBOs or debt raises in the same industry with similar leverage, and then base on that.
if you’re looking for some placeholder assumptions. Maybe try L + 400 on a 1L with 1% annual amort payable quarterly and a libor floor of 1%. Assume you can lever up a 1L 4-5x ebitda and everything else is 2L. 2L at L+700 no amort, 1% floor. Maybe 1 to 2 turns of ebitda for the 2L. Assuming you’ve got some equity cushion behind that.
Again, this is all from the hip because I have no context, but in the effort to get you something to plug into your model, try the above for an LBO.
I’m in RX though so someone from lev fin or m&a can come in and dunk on me.
Nope you got the broad strokes. Although in this market, you can level the 1L a bit more.
This is all wrong, as someone in coverage this is how I would determine pricing.
Dear Lev fin colleague, how much could I lever company ABC in my lbo model assuming a 1L / 2L structure, please also provide pricing. You can send debt comps but candidly I ain't gonna read'em. K thx, bye. Sincerely, coverage.
Typical 2L pricing is 400bps back of where the 1L lands. It's a rough market convention. But of course, credit profile, industry, structure, etc. all impact.
Are first lien the same as senior secured? And, 2nd lien the same as senior unsecured or senior subordinated?
I’d take a look at rosenbaums section on financing sources. It’ll lay out the distinctions between the types of debt.
To answer your questions, 1L and senior secured are typically going to be the same. Senior just means that something is not subordinated. 2L means that something is secured by a second priority lien, so it is not the same as unsecured debt. Don’t think senior subordinated can exist.
Regardless, I’d recommend brushing up on Rosenbaum.
Senior subordinated definitely does exist. It all depends on what the cap stack looks like. Both a 1L and 2L would be considered senior secured. Typical structure for an asset heavy business with large working capital swings could look like:
senior secured credit facilities:
ABL revolving facility: generally 1st priority claim on working capital which is the most liquid and generally has the highest recovery in bankruptcy
1st lien term loan: second priority claim on working capital, first priority claim on nearly all the company’s remaining assets
2nd line term loan: 3rd priority claim on working capital (at this point it doesn’t really matter because working capital is likely already used up in the case of a bankruptcy from the revolver and 1L holders) and 2nd priority claim on nearly all the company’s remaining assets
senior subordinated credit facility:
senior unsecured notes (bonds), classified as a general unsecured creditor in bankruptcy
junior subordinated credit facility:
this will be likely mezz debt and will be a combination of PIK + cash interest and likely equity warrants. Not very common in typical LBO structure. You really only see mezz in 1) distressed situations and / or 2) middle market companies which are raising too small of a debt quantum to enter the syndicated loan market
FYI Rosenbaum on debt financing - particularly w/ loans will be misleading and if label wrong. Called TLB or 1st lien “bank debt” (bank debt = TLA) with no mention of 2nd lien. All examples are “bank debt + high yield”. —yeah maybe for REALLY large deals where 2L gets replaced w/ high yield bc market size of 2L and capacity becomes issue (generally like $1B of junior debt and higher will go HY.
You can tell the guy who wrote it had no expertise in loans. Def a bond guy. For example - section on call protection / prepayment premium - writes about typical for high yield premium (NC with make whole type stuff). NO mention of call protection on loans. Just low key moved on—-yeah bc he doesn’t know!!
Also there’s no TLC - its funny you’ll see this TLC in modeling courses named dropped bc theyre copy cats that just take someone else’s word.
Don’t read that book for Lev fin prep. Lev Fin guys would agree. Gonna stop there
Ha. I thought it was helpful. You guys must’ve gotten harder interview questions than me
Any recs for books relating to LevFin?
Do you have any recommendations on books for understanding debt (loans) and loan financing? Ideally looking for debt financing: that companies raise routinely, for acquisitions and that raised for LBOs.
Most of the stuff I have come across is based of FI but bonds etc.
Would an incoming intern have to know all about this going in? and how well do we have to know this as an intern?
This is for a private credit interview for people with 2 years of IB experience. No worry about it.
I interview kids in a levfin group and would expect prospects to have at least some familiarity with the topics discussed in this thread, especially if they say they are particularly interested in credit
Hi - I'm in special sits PE/PC. Typically for LBO situations (note stuff are dependent on the company cash flow profile and purchase multiple etc) where we attach as pref, it goes sth like the following as of H2 2021: (i) 1L detaches at 5.25x at L+350; (ii) 2L goes 5.25x-7.75x at L+750, i.e. ~400bps premium to 1L; (iii) pref stack is structured as a perp with soft put to get B- rating, and goes 7.75x-9.5x at L+1050+. And obviously, not all LBO assets can afford a pref. Hope this helps, good luck.
I want to provide some correct info on this 1st lien / 2nd lien topic.First, all bank debt are 1st lien. These are your abl revolver or cash flow revolver, typically price at L+125-175 for ABL or L+300 ish for cash flow. They are typically leverage at no more than 4x EBITDA. People will sometime consider TLB as 2nd lien but IMO HY is the real 2nd lien.Now, revolver, TLA / TLB and IG bonds or HY is very different from the concept of 1st / 2nd lien or unitranche debt provided by a private credit firm. The leverage seem to vary firm to firm and every firm have their own appetite for deals. Generally, the spread varies a lot deal to deal and firm to firm. This is all determine by each lenders own cost of capital. 1st lien are be price at L+400-500 or more and 2nd lien could be L+800-900 or even higher. Pricing is directly impacted by how they feel about the deal.
Some of this is true, but you’re kind of conflating concepts. TLB, TLA, and HY are sort of referring to types of debt that are offered to different markets/lenders. Those markets have started to blend together a bit these days, but it’s very different than the concept of 1L/2L which specifically relate to lien priority. HY could be either 1L, 2L, or unsecured. It depends on the deal. I’d really advise you from steering clear of the idea that HY is the real 2L.
100% agree. However, I have often seem internal credit approval that use HY and 2nd lien sub debt interchangeably. Therefore, when I was recruiting for private credit roles, I was under the impression that 1st lien = senior secured and 2nd lien are essentially unsecured.
Y’all are fools. Just look at rate or spread per turn of leverage, similar to CDS curves the rate or spread per turn of leverage should be slightly higher on the 2nd lien as risk feee structure isn’t inverted
if 1L is 4x at 3.2% or 80 bps/turn
then 6x 2L should not priced inside of 4.8%
There is a roughly 350 - 400 bps spread between 1L and 2L because of where value breaks (far greater than 80 bps/turn). 2L spreads are not linear to 1L spreads based on leverage. Your logic is completely incorrect in regards to the 2L.
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