March 2006
Second-lien financing: Untapped resource or risk?
Second-lien financings grew dramatically in 2005. Total US second-lien loan issuance alone amounted to more than $22 billion in 2005. In Europe, second-lien issuance totalled €5.75 billion in 2005, rising from €1.88 billion in 2004.
The structure has been growing in popularity with corporates since second-lien structures first came on to the market at the beginning of the decade. With the economic slowdown in full swing at that point, several distressed US energy companies looked to second-lien loans to secure the capital needed to survive the downturn.
No data
However, some in the market are now questioning the long-term impact of such structures and what the fallout will be when the corporate default rate once again rises. In such a new market, there is no historical data on just what will happen should these financings suffer stresses.
According to research released by GE Commercial Finance in late 2005, second-lien loans hold their own against other capital structure...
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