Secured lenders will routinely require an intercreditor agreement to protect their interests before allowing a borrower to obtain a second lien loan. Lenders also review a borrower's debt-to-income ratio, which shows the percentage of monthly income dedicated to paying debts. 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. These financial metrics include credit scores, earnings, and cash flow. Liens can be voluntary or consensual, such as a lien on a property for a loan. Bank A puts a lien on the property’s title and becomes the first lien. Second lien priority ranking example. The asset continues to belong to you though. Pledging assets to secure a second-lien also poses a risk to the borrower. 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. 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. 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. 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. These loans came into broad usage during the mid-1990s as the institutional loan investor base grew. Senior debt is borrowed money that a company must repay first if it goes out of business. Another result of default for a business is the impact on the company's cash flow. If a business falls behind on payments, loan covenants trigger that might require the sale of assets to pay down the debt. Due to the subordinated call on pledged collateral, secondary liens carry more risk for lenders and investors than does senior debt. Investopedia uses cookies to provide you with a great user experience. And despite the increased amount of second-lien loan paper 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 debt refers to loans that are reimbursed only after loan balances on senior debts are repaid in full following a default. 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. Second-lien loans are more attractive 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. Also referred to as a Term B Loan or an institutional term loan. Cash flow is a measure of how much cash a company generates to run its operations and meet its obligations. 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. As a result, second mortgage loans often carry higher interest rates than first mortgage loans. 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). Issuer: NewPage Corporation. 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. Junior debt can thus offer investors a higher interest rate than traditional fixed-rate debt, but with greater risk. 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. During the application process, second-lien lenders usually assess many of the same factors and financial ratios as first-lien lenders. 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. These covenants place restrictions and outline specific requirements for the borrower. Once they receive payment for their finished products, they pay off the LOC and begin the process again for the next sales cycle. Once middle market facilities began to include term loan tranches, the facilities took on some characteristics of larger syndicated facilities. 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. Paid out at one time, in the event of bankruptcy at one time, in the event a. 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