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
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