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Second Lien Financing

A lien is a kind of security interest given over an item of property as security of a payment of debt. Second lien financing, otherwise known as last out participation is a kind of financing taken against a security interest in assets of a particular company whereby the assets are second in ranking behind a conventional senior credit facility. A second lien creditor will therefore be expected to agree by a binding inter-creditor contract to lower its claims on the assets to the first lien secured lenders.


Second lien financing, which in itself is a form of subordinated debt, is possibly a very powerful funding tool that is meant to offer transition capital. Second lien loans are in particular very attractive to companies that have restricted access to capital markets perhaps because of their financial issues or operational issues that relate to change of ownership, restructuring or turnaround. The main institutional sources of second lien financing are hedge funds, collateralized loan obligations, insurance companies, and finance companies.

Even though second lien financing is sometimes focused on influencing takeover and various other acquisitions, it is more frequently used to restructure a company’s operations and finances. Most companies seek second lien financing to pay down bank loans, help refinance a much expensive debt or even augment operating cash to the balance sheet. Second lien loans are generally planned in one of two ways:-
(1) The first lien is secured by every available asset and the second lien banks on the incremental asset coverage that has already been taken on the same security pool. Its to be noted that the first and the second lien holders are given a security interest in the same guarantee, basically all or part of the borrower’s asset.
(2) Both the first and the second liens are secured by two different pools of capital

Both the first and second lenders have a well defined relationship with the borrower, which is put down in writing in a legal credit document. However, the main document stipulating the main relationship between the lien lenders is the inter-creditor agreement.

The Benefits of Second Lien financing

(1) If a company maxes out its asset-base borrowing abilities, it is able to get extra financing from lenders who are willing to be second to other creditors by funding the second-lien loans.
(2) Secondly, second lien financing acts as a very attractive financing alternative for Chief Financial Officers as it typically offers better terms compared to subordinated debts, hence allowing companies to utilize unused portions of their assets as security. Still on point, second lien financing is attractive to lenders in the sense that since it is secured asset in itself, it’s less perilous compared to normal mezzanine financing options.

In a normal first-lien loan, the creditor discounts the assessed value of the collateral placed by the borrower by about 15%, creating a pillow against depreciation, and thus funds a loan up to that value. When it comes to second lien, the creditor takes the remaining value of the collateral as guarantee for further funding, in exchange for a high rate of interest

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