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Second lien debt

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Quick Answer

Second lien debt holds a junior security interest in the same collateral as the first lien, not a junior claim on payment.1,2

What it is

The distinction is the whole instrument. A second lien lender is generally paid on the same schedule as the first lien and only falls behind on enforcement against collateral, governed by an intercreditor agreement with standstill and payment-blockage terms. Contractual subordination, by contrast, subordinates the payment itself.1,2

Operational context

What good looks like

Why It Matters

Recoveries turn on which subordination applies. Treating second lien and subordinated debt as the same layer produces a downside model that is wrong in the only scenario the model exists for.1

Frequently Asked Questions

What is Second lien debt in venture capital?

The distinction is the whole instrument. A second lien lender is generally paid on the same schedule as the first lien and only falls behind on enforcement against collateral, governed by an intercreditor agreement with standstill and payment-blockage terms.

Why is Second lien debt important for startups?

Understanding Second lien debt is critical for founders navigating the fundraising process. It directly impacts deal terms, valuation, and the relationship between founders and investors.

Sources & References

  1. 1.T2-06 — Loan Syndications and Trading AssociationLSTA — Loan Market primers and glossaryLoan Syndications and Trading Association(Second lien debt holds a junior security interest in the same collateral as the first lien, not a junior claim on payment.)primary · T2 · debt-capital-structure · instrument
  2. 2.T3-24 — Latham & WatkinsLatham & Watkins Book of Jargon — Leveraged Finance and US Corporate & Bank Finance editionsLatham & Watkins(Second lien debt holds a junior security interest in the same collateral as the first lien, not a junior claim on payment.)secondary · T3 · debt-capital-structure · instrument

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