Acquisition finance—second lien financing
Produced in partnership with Ian Chin of Morrison & Foerster LLP
Acquisition finance—second lien financing

The following Banking & Finance guidance note Produced in partnership with Ian Chin of Morrison & Foerster LLP provides comprehensive and up to date legal information covering:

  • Acquisition finance—second lien financing
  • What is second lien financing?
  • Development of second lien finance
  • Documenting the second lien facility
  • Key features of second lien debt
  • Intercreditor position
  • Restructuring

What is second lien financing?

Second lien financing is a form of financing that is principally secured by the same security package as senior or first ranking debt, but ranks behind such senior or first ranking debt (whether in priority of payment and/or security; for further detail, see: Intercreditor position section below) on a second ranking basis. It serves as a layer of debt between senior bank debt facilities and other junior or subordinated debt in a leveraged buy-out.

Second lien debt usually takes the form of term loans (or notes in the US).

Investors in second lien debt are generally institutional investors such as funds that invest in leveraged loans, collateralised loan obligations (CLOs), hedge funds and other specialist debt funds.

Second lien financing is sometimes used in leveraged acquisition finance transactions:

  1. as a useful addition to the capital structure to make up any shortfall in the purchase price when the senior facilities and equity investment (and any other funding) are combined

  2. to increase leverage multiples in the acquisition without having to extend the size of core senior debt or to use additional amounts of more expensive junior debt (such as mezzanine bank debt or high yield notes), and/or

  3. to access certain kinds of lenders who prefer to invest in debt which is higher risk and higher reward rather than