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 will decline by the same percentage because they share the same probability of default (PD).
- The First-Lien Term Loan, because it has a higher dollar amount at risk.
- The First-Lien Term Loan, because its lower spread makes it more sensitive to interest rate changes.
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