A second lien loan is a tranche of debt secured by second-ranking security interests over the borrower's assets — behind the first lien (senior secured) lenders but ahead of unsecured creditors and equity. In the event of default, second lien creditors can only enforce their security and recover from pledged assets after the first lien has been fully repaid. This subordination of enforcement — not just of repayment priority — justifies a spread premium of 200–400 basis points over first lien pricing for equivalent tenors.

The second lien combines the economic characteristics of secured debt (better recovery than unsecured in default — typically 50–70% vs. 10–30% for unsecured) with contractual flexibility closer to mezzanine debt (covenant-lite structures, bullet repayment). It is primarily used in mid-to-large LBOs (VE €50–500 million) to increase leverage beyond the senior debt capacity without the equity cost of mezzanine convertibles. In the European direct lending market, second lien has partly replaced traditional mezzanine as direct lenders structure the full debt stack (first lien + second lien, or unitranche). The Debt/EBITDA ratio of an LBO structure including second lien may reach 5.5–7x in the mid-market.

In a due diligence on a leveraged capital structure, second lien debt must be analyzed in the enterprise-to-equity bridge: it is a debt-like item deducted from enterprise value, and the intercreditor agreement (ICA) between first and second lien lenders defines the standstill periods and enforcement hierarchy that materially affect the practical priority of each creditor class.

At Hectelion, we analyze and structure second lien debt in our LBO structuring and due diligence mandates.