First lien vs second lien

A first lien loan holds the senior secured claim on a borrower's collateral: if the company defaults, first-lien lenders are paid from collateral proceeds before anyone else. A second lien loan is secured by the same collateral but stands behind the first lien in the waterfall — it recovers only from what remains. That ordering drives everything else: second lien carries higher spreads (often 300-500bps above first lien for the same borrower), lower expected recovery in default, and greater mark volatility when credit quality deteriorates.

The practical rule of thumb from decades of leveraged-credit history: first-lien loans have historically recovered meaningfully more than second-lien in default — commonly cited averages sit near 60-70% for first lien versus roughly half that for second lien, though any individual outcome depends on collateral coverage and structure. This is why the same borrower's first and second lien can be marked very differently by the same manager without inconsistency: a stressed credit might reasonably carry a first lien at 92 and a second lien at 70.

Seniority is also where cross-vehicle mark comparison needs the most care. Two vehicles holding "the same credit" may hold different liens — comparing a first-lien mark against a second-lien mark and calling the gap a valuation disagreement is a classic analytical error. Genuine mark dispersion is same-borrower, same-lien, different-mark. And occasionally the inversion itself is the story: a second lien marked at par while first-lien holders mark at 87 is a structure worth understanding before the next quarter's filings.

SpreadVista tags lien seniority from each filer's own Schedule of Investments disclosure, keeps mark comparison lien-aware across 86 BDCs and 55+ funds, and surfaces same-lien dispersion separately from cross-structure gaps.