medium · Debt Capital Markets credit-ratings-risk
A leveraged borrower has a $500 million First-Lien Term Loan at L+300 and a $200 million Second-Lien Term Loan at L+650.
If the company's EBITDA margins compress, which tranche is likely to experience the most significant price decline in the secondary market?
- The Second-Lien Term Loan, because it has higher LGD and its 'equity-like' risk increases as leverage rises.
- Both decline by the identical percentage because they share one issuer and therefore one probability of default.
- The First-Lien Term Loan, because its larger principal balance places a greater absolute dollar amount at risk.
- The First-Lien Term Loan, because its lower spread leaves it more exposed to shifts in the prevailing interest rate.
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