First Lien
Private Credit glossary · Loan Structures & Instruments
Definition
Highest-priority security interest in a defined collateral pool. In a liquidation or restructuring, first-lien claims are repaid in full before any second-lien, mezzanine, or equity claim receives a dollar; the priority is enforced through UCC perfection on personal property and recorded mortgages on real estate, with relative priority among lien classes governed by an Inter-Creditor Agreement (ICA). Historical first-lien middle-market recovery is sim 70%, vs. sim 40% for second-lien and sim 20% for mezzanine.
First Lien in plain English
When a company borrows money, it often promises specific stuff it owns — buildings, equipment, inventory — as a backup the lender can seize and sell if the loan isn't repaid; that backup is called collateral. Being 'first lien' means you're first in line to get paid from that collateral if things go bad, ahead of everyone else, and you must be paid back in full before anyone lower in line sees a single dollar. It's like being the first name on a sign-up sheet: everyone below you waits until you're completely done. This front-of-line spot is why first-lien lenders historically recover about 70% of their money when a borrower collapses, versus roughly 40% for the next group (second lien) and about 20% for the group after that (mezzanine). The pecking order is spelled out in a contract between the lenders called an Inter-Creditor Agreement.
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