First Lien on Total Assets

I got one questions regarding the liquidation value of a company that has a first lien on total assets.

Let's not talk about the fair value of the assets. I need to know if the lender has priority also on the current liabilities.

First I thought that the value was (Total Assets - Current Liabilities) and the lender had priority only on the other lenders (Long Term Debt - Non-Current Liabilities).

Do you agree?

If not, does the lender have a priority also on the current Liabilities (employees, tax, etc)?

Thanks

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Comments (4)

Feb 17, 2019

alessandro_niglio, pure crickets, that's where I come in. Any of these useful?

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  • More suggestions...

Hope that helps.

Most Helpful
Mar 2, 2019

In short, Yes. Standard bank loan docs will have a blanket lien on any and all assets.

More specifically, a bank is likely to have a Revolver (revolving line of credit) in place to the ST Assets which will expand and contract on the value of AR and Inventory. So as a business is winding down, the collections wind down and the revolver balance pays itself down. This works very efficiently, so much so that even bankers are always a little surprised on just how efficiently a revolver reduces itself as it's designed to do. Even more specifically, the bank will have a lockbox and sweep account which gives them total dominion over cash.

Term notes on long term assets are usually recovered through a sale or auction-sale of those assets.

Here's what trumps a bank in a liquidation;
- Payroll and labor. Not severance, but pay for work completed is #1.
- Witholdings, usually payroll withholdings or sales taxes. Must be paid. Google IRS 941 Prison and you'll see that people go to jail for not paying these. No Excuse.

  • Environmental fines and claims and cleanup will take a 2nd to the secured lenders but be ahead of the unsecured. This is not codified but the US Govt generally does not jump ahead of the senior secured.
  • Income taxes are behind creditors but ahead of equity in a liquidation.

Ask a follow up question if you have one.

    • 6
Mar 7, 2019

Would also add to the top that DIP financing (normally provided to Chapter 11 companies) sits absolute priority to other debt when it is in place, as compensation for the lender taking so much risk.

Essars Algoma has a DIP financing syndicate led by Deutsche as an example - it's been pretty well covered.

Mar 2, 2019