The liens may be second but the securities are apparently first on investors' minds. The market for high-yielding second lien notes is hot because it offers attractive spreads (LIBOR plus 600-850 basis points) and as a floating-rate instrument is appealing to the buy-side in a rising-rate environment, said Kirk Davenport, partner in the corporate finance and capital markets group at Latham & Watkins. As a result, investors were eager to learn about the structures of second lien investments, leading to a standing-room only crowd filled with hedge fund investors for the panel.
Davenport said there is no standard agreement between first lien and second lien holders and investors should be aware of this before participating in the maturing market. He said the situation is similar to the way high-yield subordination between junior and senior creditors was 15 to 20 years ago before rights had been negotiated. He added Latham & Watkins is working to start a national dialogue to create standard rights between first lien second lien term holders.
Despite the high turnout for the panel and broader interest in the topic, some investors said they are wary of jumping on the second lien bandwagon. One investor predicted the market is something hedge fund investors will sink their teeth into and then back out of, compressing any returns. Another investor noted how the growth of the market indicates "bankers are willing to come up with financial instruments to satisfy any kind of demand." The volume of second lien notes has grown to $5.23 billion for the first four months of the year, compared to roughly $3.26 billion for all of last year, according to Latham & Watkins.
