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. Second-lien debt can be loans or bonds. Recent US second-lien issuers include Dynegy and Playtex.
Hedge funds like second-lien debt since it qualifies as senior debt. Many funds cannot buy subordinated debt. And in an insolvency or workout, second-lien debt gives more investor protection and bargaining power.
Cognis Deutschland, the Dusseldorf-based specialist chemicals company bought out from Henkel in 2001, completed its e1.75 billion recapitalization earlier this summer. The deal was the first new money offering by a European corporate to use a US-style second-lien structure. The proceeds helped finance a e330 million dividend to sponsors including Goldman Sachs PIA and Permira.