A new style of leveraged financing is set to take off in Europe as hedge funds’ appetite for second-lien debt crosses the Atlantic.
Second-lien debt is an alternative to mezzanine or high-yield debt. Second-lien bonds resemble high-yield bonds but are secured on the same collateral as first-lien debt provided by senior banks. And they often have covenants capping a borrower’s future debt. Second-lien loans are also covenanted and are available for long maturities.
From a standing start two years ago, second-lien financings now make up 7% of the US leveraged loan market.
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