First lien and second lien describe priority of claims on the same collateral: first-lien lenders are repaid from collateral proceeds before second-lien lenders receive anything. The ordering is the cleanest expression of secured-credit seniority — and the recovery statistics between the two positions justify the vocabulary’s prominence.
How lien priority works
Both layers are secured — the second lien is not unsecured debt, but a junior claim on the same assets — with the relationship governed by an intercreditor agreement: the contract setting payment priority, enforcement standstills (second-lien holders typically must wait out a period before acting on collateral), and bankruptcy behaviors (voting, adequate-protection, and plan rights). Economics follow position: second-lien paper prices hundreds of basis points wide of first-lien for the same borrower, compensating for recovery differences that default studies make stark — first-lien recoveries historically in the 60–80 cent range versus dramatically less for second lien, whose cushion is only what collateral value survives the first lien’s claim. Where the layers live in the market: large LBO structures historically stacked first-lien term loans over second-lien tranches; the unitranche collapsed the stack externally while recreating it internally (first-out/last-out); and BDC and credit-fund disclosures classify holdings by lien position — the portfolio table’s “first lien %” being a headline risk descriptor, with the modern caveats the senior secured page details (attachment leverage and document quality determine what the label is worth). The era’s complication deserves its sentence: liability-management transactions have shown that lien priority can be re-engineered mid-life through document loopholes — priming exchanges and collateral drop-downs turning yesterday’s first lien into something junior — making covenant and amendment protections part of what “first lien” actually means.
Related terms
Senior Secured Lending · Unitranche · Capital Stack · Mezzanine Debt · Tranche
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