One component of the senior debt of a company is typically a revolving line of credit.  Accounts receivable financing and inventory financing are the two most common types of senior secured revolving credit, which is working capital financing that enables the lender to take legal action to reclaim and sell the assigned or pledged working capital assets in the event of the borrower’s default on the financing.  Senior secured revolving credit is generally the cheapest type of loan available to small businesses and young growth companies that do not have a sufficient credit history to get an unsecured loan.  Among the types of collateral, inventories and accounts receivable result in the highest average recovery rate

When a company’s current assets are already claimed by asset-based financing secured by accounts receivables and inventories, senior debt will usually be collateralized by a first lien on the noncurrent assets.  Senior term debt is medium- to long-term unsubordinated secured debt that is collateralized by a first lien on the borrower’s noncurrent assets, usually machinery, equipment or real estate, lent against the collateral value of the pledged assets.  It is generally provided by banks and finance companies, although is often also obtained through private placements to institutional investors and public bond issuance.

Capital Stack in Real Estate Financing (Example)
Instrument Proportion Yield
Sponsor Equity 5%-10% +15%
Preferred Equity 5%-20% 11%-15%
Mezzanine Debt 10%-20% 6%-10%
Senior Debt 65%-85% 4%-5%

Second lien debt is a senior secured term loan that ranks pari passu with the senior debt of the borrower in terms of payment but after the unsubordinated senior debt with regard to collateral upon the borrower’s liquidation through enforcement of its security package.  As secured debt, it ranks ahead of all unsecured debt.

A second lien “stretch senior” tranche may be used for capital expenditure, restructuring or supplementary acquisitions.  Second lien debt is an alternative to mezzanine financing since it does not require the borrower to give away its own equity in the form of warrants and can be prepaid at little or no penalty or premium.

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