Split Collateral Deal vs. 2nd Lien

Last Updated: Jun 7, 2019

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A Split Collateral Deal is a transaction where two lenders are providing secured financing to a company where one lender has a 1st priority security interest in certain assets and the other lender has a 1st security interest in another pool of assets. In an asset-based lending transaction, the working capital lender typically has a 1st priority security interest in all accounts, inventory and proceeds related thereto; while the other senior lender will have a 1st priority security interest in all other assets. Split-Collateral transactions are governed by an Intercreditor Agreement, whereby certain terms are agreed to both lenders.

In a 2nd Lien transaction, a lender may be granted a 2nd lien on all or certain assets of a company behind the prior lender who has been granted a 1st lien position against such assets. Typically, the 2nd lien lender will have to enter into a subordination agreement with the primary lender. In the event of a bankruptcy/liquidation, the 1st lien lender will be first in line to receive repayment from these assets. After the 1st lien lender has been paid out, and to the extent there is any remaining value from those assets, the 2nd lien lender may seek repayment from said assets.