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.
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 products, such as high yield or mezzanine financing. Mike McGonigle, managing director, corporate lending, with GE Commercial Finance, says: “Second-lien loans offer considerable flexibility: they can provide a stretch on traditional asset or enterprise value; their maturity generally exceeds that of first-out senior debt; the repayment stream can be structured with either a bullet or balloon maturity; and the facility itself may be designed as a term loan or as a revolver.”