The emergence of second-lien loans was a major talking point at the conference, as investors weighed up both the tightened terms and what will happen in the event of default. Since second-lien loans emerged, pricing and terms have become skinnier, said one investor. He noted that deals are now pricing at LIBOR plus 4% as there is huge demand for the paper. Many of these lenders that have rushed into these second-liens may be in for a tough time. "It's not always a slam dunk on the second-lien," he said, adding that lenders should be paying closer attention to the collateral package.
But the lawyers and restructuring bankers are already looking ahead to what may happen in a bankruptcy scenario. "The second-lien rescue financings will be a test of chapter 11," said Allan Brown, portfolio manager ad co-head of distressed debt at Concordia Advisors. He added that the emergence of the second-lien will make Chapter 11 more expensive as holders of unsecured paper will be less likely to roll over. "The attorneys are drooling. It's going to get ugly," noted C.J. Berger of Summit Investment Partners, who conjured up an image of vultures sitting on branches.