What is first lien?
First-lien debt is a loan secured by a first-priority claim on a borrower's collateral — the senior-most secured position in the capital structure. If the borrower defaults and the collateral is sold, the first-lien lenders are repaid from those proceeds before any other secured or unsecured creditor receives a cent from that collateral.
That priority is what makes first-lien debt the cheapest layer of leverage. Standing first in line for the collateral means the lowest expected loss, so first-lien lenders accept the tightest spread. It is the foundation of most leveraged financings — the large, senior term loan that everything else is structured around.
First-lien status is established by a security interest, perfected against the borrower's assets, and ranked ahead of any second-lien or junior claim through an intercreditor agreement. The strength of the position depends not only on being first in priority but on the quality and coverage of the collateral behind it.
How first lien actually works
Priority and security combine to put first-lien lenders at the front of the line.
- Take security. The borrower grants a security interest in its assets to the first-lien lenders, perfected to make it enforceable against others.
- Rank first. An intercreditor agreement establishes that the first lien ranks ahead of any second-lien or junior secured debt on the shared collateral.
- Recover first. On enforcement, collateral proceeds repay the first lien in full before flowing to junior lien holders.
- Price tightest. Because expected loss is lowest, first-lien debt carries the lowest spread of the secured layers.
Why first lien anchors the capital structure
In a leveraged buyout, the first-lien term loan is usually the largest single piece of debt and the cheapest, which is why sponsors maximize it before layering in costlier capital. Everything junior — second lien, mezzanine, equity — is sized and priced relative to where the first lien sits.
The first-lien lenders also tend to hold the most control in a restructuring, since their consent and their position over the collateral give them leverage that junior creditors lack. The seniority that makes the debt cheap is the same seniority that makes it powerful when things go wrong.