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

 

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

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Hope that helps.

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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.

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