“Secured Equity?”

Although no longer as major a factor as it once was in ship finance in the US capital markets, where equity reigns, high yield debt remains a major force in Norway as discussed in this issue. In fact we noticed that the recent Norwegian bonds are highly structured and when secured use 2nd and even 3rd priority mortgages. So, although not au courant, we thought that with the future always uncertain, it might be useful to review this financing structure that bridges the gap between equity and debt. As the source of information for this article we utilized a Latham & Watkins presentation entitled, “Everything You Always Wanted To Know About Second Lien Financings.” We found it extremely enlightening and hope we did it justice.

Various Flavors

The two most common forms of second lien financings are second lien high yield bonds (“2nd bonds”) and second lien term loans (“2nd loans”). Second bonds are just like any other high yield bonds except they are secured. There are no maintenance covenants or cross-default provisions. They are however different from unsecured high yield in that they contain a hard dollar cap on future first lien debt and a very tight ratio limiting future second lien debt. Together these two covenants protect the 2nd lien holders’ position by restricting any increase in priming debt while hypothetically allowing future additional debt so long as it is unsecured or subordinated.

This is only an excerpt of “Secured Equity?”

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