While there have always been junior secured creditors, in the first decade of the 21st century an entire specialized line of lending business on a second lien basis has developed and become more and more formalized and differentiated from traditional mezzanine lending. The basic differences between second lien lending and mezzanine lending are that second lien lending is secured (though “mezzanine” debt is itself often secured in some fashion), usually uses LIBOR as a reference rate, and has traditionally been cheaper than mezzanine debt. Also, the second lien lender usually enjoys a more favorable intercreditor agreement with the senior lender than the mezzanine lender (for example, the second lien lender does not usually have to agree not to receive payments if the senior loan is in default) but still must waive certain of its rights in bankruptcy.
While a second lien lender’s collateral will often include real estate, this form of financing has not migrated in this variation to the real estate lending arena. But see A-B Note Structure.