Considered to be a type of subordinated debt, junior debt has a lower priority for repayment than other debt claims in the case of default. Second lien loans are forms of secured debt—they require backing by a specific asset of a company and they also have priority over subordinated debt and obligations to the common shareholders. Lenders also review a borrower's debt-to-income ratio, which shows the percentage of monthly income dedicated to paying debts. More recently, however, many PE LBO sponsors are replacing the unsecured bond piece in the funding structure with a second-lien leveraged loan, resulting in all-loan debt financing. Second-lien debt has a subordinated claim to the collateral pledged to secure a loan. • Lines between mezzanine and second lien debt have begun to blur, but certain differences, such as These loans came into broad usage during the mid-1990s as the institutional loan investor base grew. Published Dec 07, 2007. Define Second Lien Term Loan Lenders. A Primer on Second Lien Term Loan Financings By Neil Cummings and Kirk A. Davenport O ne of the more noticeable developments in the debt markets in the last year has been the exponential increase in the number of second lien fi nancings in the senior bank loan mar-ket. Term Loan B HCA Sr Unsecured Bond Rating BB, Ba3 B-, B3 Size $2.4 billion $500 million Expected Recovery 80% 40% Coupon Libor + 325 = 3.55% 8.00% Final Maturity 5/1/18 10/1/18 Price $100.5 $115.75 Yield 3.45% 4.81% II. Morton buys a house and is granted a mortgage loan from Bank A. The vast majority of all second lien loans are senior secured obligations of the borrower. Assume a recession happens, dropping not only the company's income from truck sales but also the value of the property. As institutional lenders continue their search for higher-yielding assets, second-lien loan issuance in the U.S. has surged over the past few quarters, reaching $7.12 billion during the first three months of 2017, according to LCD. Maturity is generally five years or more on a term-loan basis and will generally not be earlier than that of the first-lien lender's loan. home equity loan, even if the LTV exceeds 100%. For a business, negative credit history can mean they will have difficulty finding buyers of future bonds that they may issue without offering an elevated coupon rate. Some second mortgages are for a fixed dollar amount paid out at one time, in the same way as a first mortgage. Lenders may restrict the size of second-liens to ensure the cumulative balance of the outstanding debt is significantly less than the value of the underlying collateral. Once they receive payment for their finished products, they pay off the LOC and begin the process again for the next sales cycle. Subordinated debt refers to a class of obligations that are contractually subordinated in ranking to all of the senior obligations (i.e., general non-subordinated obligations) of the company, whether they are secured or unsecured. A subordination agreement establishes one debt as ranking behind another in priority for collecting repayment should a debtor default. The term “second” means that if you can no longer pay your mortgages and your home is sold to pay off the debts, this loan is paid off second. Any amounts outstanding under the Term Loan shall be due and payable in … A credit score is a statistical number that evaluates the creditworthiness of a borrower by taking into account the borrower's credit history. A Term Loan B may have soft-call protection, with a prepayment premium paid with repayment, on a declining scale, typically a six to twelve month soft call at 101% for a first lien product. In return for being first lien holder, the bank charges 2% interest on the $10,000,000 note. Bank A puts a lien on the property’s title and becomes the first lien. As a result, second mortgage loans often carry higher interest rates than first mortgage loans. The primary risk to lenders posed by second-lien mortgages is insufficient collateral in the event of a default or a bankruptcy filing. Lenders typically include covenants in credit terms. To mitigate risk, second-lien lenders must also determine the amount of equity available in excess of the balance owed on senior debt. Increasingly in second lien Term Loan B … Due to the subordinated call on pledged collateral, secondary liens carry more risk for lenders and investors than does senior debt. … Term Loan B loans almost invariably include call protection. The specific rights of the first lien and second lien lenders are established in the credit agreements between the borrower and each class of lender as well as in an intercreditor agreement. In some cases, the term loan B will be secured equally and ratably with a pari passu tranche of secured bonds. Depending on the structure, this loan could be fully subordinated not just a second lien. Other names for second-lien debt include junior debt and subordinated debt. Following the full payment on the balance of the first mortgage, the distribution of any remaining proceeds goes to the lender on the second mortgage. Should the business not pay its debts, either lender may begin liquidation to satisfy the loan. Imagine a company with $100 million in assets is going bankrupt and has the following capital structure: $90 million Term Loan B (“TLb”), secured with a 1 st Lien on all assets; $50 million Term Loan C (“TLc”), secured with a 2 nd Lien on all assets; $40 million unsecured bonds; In this case, the $90 million goes to the TLb because it has a 1 st lien on the assets. For example, if a company has an outstanding $1,000,000 first-lien on a building, and the structure has an assessed value of $2,500,000, there is $1,500,000 in equity remaining. I think we should keep them separate. As a result of higher debt-servicing cost and interest expenses from higher interest rates, the cash flow is reduced. Similar to a senior term loan but with a second lien rather than first lien on collateral. Other calculations a lender reviews during the lending process include the market value of the building, the potential for the underlying asset to lose value, and the cost of liquidation. These debts have a lower priority of repayment than do other, senior, or higher-ranked debt. Junior debt may be in the form of loans from a bank or through the sale of bonds to investors. Issuer: NewPage Corporation. Proceeds from the term loan will be used to tender for notes issued by Chesapeake's wholly-owned unrestricted subsidiary, Brazos Valley Longhorn, L.L.C. With almost no exceptions, a borrower will take a second lien loan either at the same time or after taking a traditional first lien secured loan and the secured lenders will place limitations on the borrower's ability to pledge its assets or borrow additional secured debt. A lien is a legal claim to a property that allows the lender to seize it under certain conditions. An intercreditor agreement is a contract between multiple classes of lenders where each class of lender agrees to specific procedures and preferences in the event of a bankruptcy or liquidation. Both businesses and individuals have a credit score that ranks their ability to repay loans. Second lien loans differ from both unsecured debt and subordinated debt. Term debt is a loan with a set payment schedule over several months or years. Second Mortgage. Second Lien Term Loan Facility means the credit facility pursuant to that certain Second Lien Credit Agreement dated as of August 1, 2013 by and among The Standard Register Company, WorkflowOne, LLC, the subsidiary guarantors party thereto, the lenders party thereto, and Silver Point Finance, LLC, as amended, restated, supplemented, or modified from time to time. Second-lien debt refers to loans that are prioritized lower than other, higher-ranked debt in the event of bankruptcy and liquidation of assets. By using Investopedia, you accept our. The lender that owns your primary mortgage has the first lien on your property; your second mortgage lender has a secondary lien. For example, if a homeowner has a second mortgage in default, the bank can begin the foreclosure process. The second mortgage holder challenged the plaintiff's lien priority in that action, arguing that the plaintiff's lien priority should not relate back to the 2008 mortgage, but rather to the 2014 loan modification agreement. This article seems to be about something a little different. The arrangement fee and interest (finance) of a second lien loan are higher than those of the first lien secured loan of the same borrower because of increased risk for the lender that comes from a subordinated security interest. As a result, the company has $12,000,000 in available equity ($22,000,000 - $10,000,000). If an individual falls behind in payments or defaults on a loan, their credit score will fall. Senior debt is borrowed money that a company must repay first if it goes out of business. Company: NEWPAGE CORPORATION. Second mortgage is a common term in general usage. The outstanding loan of $10,000,000 is senior debt and is the first priority to be paid in the event of default or liquidation of the company. One major condition of a second mortgage is that lenders put a lien on your home when they give you cash or a loan. The interesting quality of second lien debt is that the assets pledged as collateral to the loan can be the same or overlap with the assets pledged as collateral to a first lien loan. As a junior debt, the second bank cannot receive the full amount of the second-lien. Second lien debt refers to loans that are reimbursed only after loan balances on senior debts are repaid in full following a default. These financial metrics include credit scores, earnings, and cash flow. Equity is the difference between the market value of the underlying asset less the outstanding loans on that asset. Format: HTML : Moody's downgrades NewPage's CFR to Caa1; outlook negative - Rating Action – 2009/06/30 – US$ 180.00. SECOND LIEN DEBT: A Guide to Key Terms and Inter-Creditor Issues, https://en.wikipedia.org/w/index.php?title=Second_lien_loan&oldid=993188623, Creative Commons Attribution-ShareAlike License, This page was last edited on 9 December 2020, at 07:10. means holders of Claims arising from the Second Lien Term Loan Credit Agreement, including, for the avoidance of doubt, current “Lenders” as shown on the “Register” as each such term is defined in the Second Lien Term Loan Credit Agreement. Also referred to as a Term B Loan or an institutional term loan. A term loan made by institutional investors whose primary goals are maximizing the long-term total returns on their investments. Second lien loans are used in leveraged buyouts to fill small gaps between the financing needs of the borrower and maximum thresholds (measured by various leverage metrics) of senior secured lenders. Although the second lien loan's security interest is subordinated to the first lien loan's interest in the pledged assets of the company, the ranking of first lien and second lien loans are the same in the event the pledged assets are not sufficient to satisfy the outstanding borrowings. As a result, Ford can borrow $6,000,000. In either event, the term loan B lenders will almost certainly be sharing the capital structure with at Second lien financings and the European loan markets. In the event of a liquidation of a company, both the first lien and second lien loans would likely be repaid in full (along with trade and other general creditors) before the subordinated lenders receive any repayment of their obligations. For example, say you borrow $50,000 and pay the money back with monthly payments over five years. -- Pnm 05:19, 31 May 2010 (UTC) Second mortgage is the common term. III. Secured lenders will routinely require an intercreditor agreement to protect their interests before allowing a borrower to obtain a second lien loan. Effective net worth is shareholders' equity plus subordinated debt: the last loans to be repaid in the event of bankruptcy. FIRST AND SECOND LIEN LOANS. Second Lien Term Loan Description: A loan that is repaid in regular payments over a set period of time. Unlike unsecured debt, second lien loans receive a pledge of specific assets of the borrower (e.g., buildings, land, equipment, intellectual property, receivables and other financial assets). In a forced liquidation, junior debt may receive proceeds from the sale of the assets pledged to secure the loan, but only after senior debt holders have received payment. Published Dec 07, 2007. Second-lien loans are “second-in-line” for any post-bankruptcy recoveries, after first-lien loans; that is, claims are junior to those of first-lien. Regardless of the reasons for the second loan, should the borrower fall behind in payment on the debt, that lender may begin procedures to force the sale of the pledged asset. A typical second lien term loan is a “term loan B”1 secured by a lien on substantially all of the borrower’s assets. Low scores make it harder for these borrowers to borrow at a later day and may impact their ability to secure employment, apartments, and items like cellphones. Also referred to as a Term B Loan or an institutional term loan. That’s the most since the fourth quarter of 2014 ($12.55 billion). The seven-year term loan B is guided at a range of 400bp-425bp over Libor with a 0% floor. Second Mortgage. Much like a second mortgage on a home, a business may be at risk of losing assets to liquidation if the second-lien lender forecloses. A first mortgage is the primary lien on the property that secures the mortgage and has priority over all claims on a property in the event of default. However, the second-lien holder may receive only a fraction of the outstanding loan amount. A loan with a second-priority claim against a property in the event that the borrower defaults. Liens can be voluntary or consensual, such as a lien on a property for a loan. Term Loan: A second lien term loan (the “Term Loan”) to the Borrower in the amount equal to $50,000,000 (subject to the terms of Annex A-I hereto). Second Mortgages Versus Home Equity Lines: A second mortgage is any loan that involves a second lien on the property. The loan is approximately $10,000,000 while the building and the property are worth $22,000,000 according to a recent assessment of its market value. Introduction to Second Lien Financings Current Market for Second Lien Loans • Second lien financings used for every type of situation: acquisitions, growth, dividends, turnarounds, restructurings, and rescue financing. If the tender is successful, Brazos Valley's ratings will be withdrawn. A second lien product may have 103% in year 1, 102% in year 2, etc., or a no-call and make-whole protection in the early years, and soft-call protection in later years. Although the second lien loan's security interest is subordinated to the first lien loan's interest in the pledged assets of the company, the ranking of first lien and second lien loans are the same in the event the pledged assets are not sufficient to satisfy the outstanding borrowings. (Brazos Valley) and repay borrowings under Brazos Valley's revolving credit facility. If there is not enough equity to pay off both loans completely, your second mortgage loan lender may not get the full amount it is owed. A term loan made by institutional investors whose primary goals are maximizing the long-term total returns on their investments. As a result of this elevated risk, these loans usually have higher borrowing rates and follow more stringent processes for approval. I don't know second lien loan very well, but my guess is that it should summarize and link to second mortgage. As an example, let's say that Ford Motor Company (F) has an outstanding loan on one of its factories that produce trucks. For example, if a borrower is in default of a real estate loan with a second mortgage, creditors may foreclose and sell the home. Second lien priority ranking example. Banking Update. If the issuing company is insolvent, and through the process of liquidation, there aren't enough assets available to repay both the senior and junior debt, the second lien investors will incur the loss. Price US$ 180.00 | Buy this Report Now. Alternatively, the term loan B might be the only second lien debt in the capital structure. Junior debt can thus offer investors a higher interest rate than traditional fixed-rate debt, but with greater risk. First lien example. The offers that appear in this table are from partnerships from which Investopedia receives compensation. Further, the first-lien holder may have stipulations on their credit terms that set restrictions regarding if the company can take additional debt or a second mortgage on the building. During liquidation, second-lien is repaid before common stockholders, Adding a second lien loan can provide access to capital, In a liquidation, junior debt may not receive full repayment, Repayment is on the financial viability of the issuing company, Insufficient collateral may be secured to the debt. An institutional term loan (“B” term loans, “C” term loans or “D” term loans) is a term loan facility carved out for nonbank, institutional accounts. However, the second bank will only lend 50% of the remaining equity for second-lien debt. What does SECOND LIEN LOAN mean? Second-lien debt can help a borrower gain access to much-needed financing, but the risks must be weighed, and interest rates are often higher than on the first lien. However, if a 2nd lien home improvement loan exists, and you are creating a new 3rd lien Texas home equity loan, then you must consider the 80% LTV. Investors in subordinate debt therefore must be aware of their position in line to receive full repayment of principal in the case of insolvency of the underlying business. These covenants place restrictions and outline specific requirements for the borrower. The asset continues to belong to you though. Covenants Senior status in the capital structure is not the only credit advantage syndicated loans offer relative to high-yield bonds. To the extent that the value of the assets is sufficient to satisfy the company's obligations to the first lien secured lenders, any additional proceeds from the sale of the pledged assets would then be made available to the second lien lenders as repayment of the second lien loan. Once middle market facilities began to include term loan tranches, the facilities took on some characteristics of larger syndicated facilities. In other words, second-lien is second in line to be fully repaid in the case of the borrower's insolvency. After liquidation and the payment of the balance from the first, $10,000,000 loan, the company has only $5,000,000 in remaining funds. Second-lien debt is borrowing that occurs after a first lien is already in place. Although second-lien debt investors get paid before common stockholders in the event of a company's demise, junior debt has its risks. And despite the increased amount of second-lien loan paper Foreclosure is a legal process where a lender takes control of the property and begins the process of selling the asset. Another term for this type of debt security is junior or subordinated debt. Cash flow is a measure of how much cash a company generates to run its operations and meet its obligations. Linklaters. Only after all senior debt, such as loans and bonds, have been satisfied can second-lien debt be paid. Although junior debt can offer investors a higher interest rate than traditional fixed-rate debt, investors need to be aware of the financial viability of the issuing company and the likelihood of being repaid. Second-lien loans are typically highly leveraged and low in credit quality (single B to CCC rating categories) and, therefore, considered risker than first-lien loans. Borrowers may use secondary liens to access property equity or to add capital to a company's balance sheet. Businesses generally have a wider range of assets to pledge as collateral, including real property, equipment, and their accounts receivable. If a borrower defaults on a secured loan, the senior lien holder may receive 100% of the loan balance from the sale of underlying assets. Second-lien loans can be either cash-flow loans (determined by using a multiple of EBITDA) or asset-based loans (using appraisal valuations of the current assets). http://www.theaudiopedia.com What is SECOND LIEN LOAN? Typically, borrowers with a low risk of default receive favorable credit terms resulting in lower interest rates. A subordination clause is a clause in an agreement which states that the current claim on any debts will take priority over any other claims formed in other agreements made in the future. Foreclosure happens when a borrower cannot make full, scheduled principal and interest payments as outlined in the mortgage contract. It subsequently refers to the ranking of the debt in the event of a bankruptcy and liquidation as coming after first-lien debt is fully repaid. If a business falls behind on payments, loan covenants trigger that might require the sale of assets to pay down the debt. 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