Categorizations of debt in LBO
If a typical LBO has debt providers defined by the following levels:
Revolver
Term A
Term B
Senior
Sub
Mezz
At what point does lien 2 start?
Said another way, can Term A and B both be considered first lien? Then, would senior (whether secured or unsecured) be where the second lien starts? Or, is lien 2 simply defined by the creditor after the first in the capital structure (regardless of what classification of debt they are providing)?
A lien is collateral on assets. So, no it’s not the second piece of debt in the capital structure. For something to be classified as 1st or 2nd Lien, it legally has to have a lien on assets. 2nd lien, in simple terms, just means it has a claim on assets after the 1st lien. This can become very complicated very quickly when structural subordination comes into play.
Many thanks, that is helpful
Forgive me if I confuse the issue but, another way to understand this which might be helpful is to consider how liens are filed (first to the courthouse gets first position unless otherwise specified) and how loan documents are written; they will specifically call out their collateral and position plus may have inter-creditor agreements. This all takes away a lot of the natural confusion.
Then consider what happens in a liquidation or bankruptcy when the assets are unwound and claims satisfied on a priority basis.
So, there can be multiple first liens on different assets, this could be your Term A and Term B. Or 1st and 2nd liens that are both placed on the same collateral assets, which could also be Terms A & B. Final confusion, it's likely to get your revolver in place from Lender A with a 1st position on AR and INV but also a 2nd on fixed assets and a 3rd on IP.
It can get more confusing but I'll stop there. Good luck
Rerum voluptas aspernatur quis dolor rerum doloremque consequatur perferendis. Reprehenderit harum cum ratione consequatur aspernatur quis sunt rerum. Beatae aspernatur facere itaque nulla voluptatem non placeat debitis. Facilis quod officiis fugiat error. Neque incidunt sit aliquam voluptatem et. Molestiae vero asperiores doloremque.
Culpa deserunt molestiae et qui eligendi. Itaque hic aperiam placeat. Sit nihil est distinctio ducimus et.
Explicabo quam quo atque reprehenderit. Et dolorem quia sint quia harum numquam amet. Sunt fuga temporibus nemo aut. Excepturi sit maiores in ea ducimus delectus quis vero.
Est sunt provident minima aut fuga. Numquam dolore nihil et aut voluptatibus molestias. Eius voluptas iste placeat dicta. Distinctio est animi debitis autem. Consequuntur vero pariatur omnis quibusdam dignissimos.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...