When a creditor or bank has the right to sell the mortgaged or collateral property of those who fail to meet the obligations of a loan contract.

As a general rule, permitted prior liens fall into four categories: Liens securing the first lien debt and all related first lien obligations Liens that predate the second liens (which, in some deals, may include liens that the borrower “inherits” if, for example, it acquires assets in the future that are subject to liens) Liens securing a maximum amount of purchase money debt Liens that are not voluntarily granted by the borrower but arise by operation of law and are entitled by law to priority over the second liens. In some deals, the parties may agree to include other liens in the definition of permitted prior liens. If the obligations secured by permitted prior liens are material, however, the agent bank may find it much harder to market and/or syndicate the transaction successfully.

Typically, the first priority lien debt is a senior working capital facility, usually consisting of a revolving loan facility, sometimes coupled with a term loan facility. Senior working capital lenders will generally insist on holding a first priority lien on the borrower’s assets; however, in a number of transactions, they have been willing to permit second lien lenders to hold a lien on the borrower’s assets.

In a second lien loan transaction, the second lien lenders hold a second priority security interest on the assets of the borrower. Their security interest ranks second to the liens in those assets securing the first priority lien debt. In the event of a foreclosure on the shared collateral that secures the first and second lien debt, the first lien creditors will be entitled to be paid in full from the enforcement proceeds before any payments are made to the second lien lenders out of those proceeds.

In some second lien financings, the first lien creditors have given second lien lenders an option to purchase the first lien obligations. The exercise price is generally the par value of the outstanding first lien debt plus accrued interest (excluding any amounts payable as prepayment or acceleration penalties or premiums). Usually, the option can be exercised during an agreed time period starting on the date on which the borrower files for bankruptcy and/or the first lien creditors take any action to foreclose on their collateral. Some second lien lenders view the purchase option as a “must-have” provision. First lien creditors generally view the purchase option as acceptable since, if exercised, it allows them to exit a troubled credit at par.

This lien covers nearly all types of assets and collateral, owned by a debtor. It usually only gives the creditor the right to a specific asset. A blanket lien gives the creditor a legal interest in all the debtor's assets and other collateral. Defaulting on a debt in this situation can result in "losing your shirt".