First & second lien
Factual definition
First and second liens are different lien priorities over the same collateral. First-lien claims generally have priority over second-lien claims in that collateral, subject to enforceable documents, applicable law and relevant costs or competing claims.
Compare lien priority on the same collateral
Hypothetical terms: US$60m of first-lien debt at 6% annual interest and US$20m of second-lien debt at 11%, secured on the same identified collateral. Total principal is US$80m.
These assumed rates are not a market quote or proof of the exact value of priority.
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| Measure | First lien | Second lien |
|---|---|---|
| Principal | US$60m | US$20m |
| Assumed annual interest rate | 6% | 11% |
| Collateral priority | Ahead of second lien, subject to documents/law | Behind first lien on shared collateral |
| Recovery | May be impaired if available value is insufficient | Depends on remaining value and applicable claims |
Apply the priority to net collateral proceeds
Use the US$60m first-lien and US$20m second-lien principal balances above. Assume enforceable priority, no unpaid interest or other claims, and US$50m available from the shared collateral after all permitted costs and higher-priority amounts.
The first-lien lender receives US$50m and remains US$10m short; the second-lien lender receives nothing from that collateral. First ranking did not make the first lender whole.
If net available proceeds were instead US$70m under the same assumptions, the first receives US$60m and the second US$10m. The second lender’s higher stated interest rate does not change the assumed priority of these recoveries.
The intercreditor agreement also matters for enforcement control and payment restrictions. Read those rights separately from the interest-rate comparison.
Where First & second lien fits
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