In a split-lien structure the asset-based lender takes first priority on working capital assets, meaning receivables, inventory, deposit accounts and their proceeds, and second priority on everything else. The term lender takes first priority on equipment, real estate, intellectual property and the shares of subsidiaries, and second priority on the working capital assets. An intercreditor agreement sets the boundary, what each lender may do in a default, and how much debt each may add. Because each lender lends against what it values best, the pair often provide more total debt, at a lower blended cost, than one lender would.
- ABL priority collateral
- Receivables, inventory, deposit accounts, and their proceeds
- Term priority collateral
- Equipment, real estate, intellectual property, shares of subsidiaries
- Each lender's other position
- Second lien on the other lender's priority collateral
- Governing document
- An intercreditor agreement between the two lenders
- Why do it
- More total debt and a lower blended cost, each lender pricing what it knows
- Also called
- Crossing liens, or an ABL and term loan structure
Two first liens, on different assets
Most borrowers know two ways to have two lenders. In a first lien and second lien structure, both lenders have liens on everything and one is senior across the board (see first lien versus second lien). In a pari passu arrangement, both share every asset equally. A split-lien structure is different: each lender is first on one pool of assets and second on the other, so the liens cross.
| Asset | Asset-based lender | Term lender |
|---|---|---|
| Accounts receivable | First | Second |
| Inventory | First | Second |
| Deposit and securities accounts | First | Second |
| Cash proceeds of receivables and inventory | First | Second |
| Machinery and equipment | Second | First |
| Owned real estate | Second, or none | First |
| Trademarks, patents and other intellectual property | Second, with a license to sell branded inventory | First |
| Shares of subsidiaries and general intangibles | Second | First |
The split follows what each lender underwrites. The asset-based lender lends on liquid collateral it can count every month through a borrowing base. The term lender lends on the business's earnings and the long-lived assets that produce them. Each takes first claim on the assets it would actually rely on to be repaid.
Split lien is about lien priority, not payment priority. Neither loan is subordinated in right of payment; both are paid as scheduled until something goes wrong.
Why splitting collateral can mean more debt, for less
A single lender holding everything has to price and size the whole loan as one risk. A cash-flow lender sizes on earnings: senior cash-flow lenders to lower-middle-market companies commonly lend 2x to 3.5x EBITDA in total, revolver included. It will not usually lend more against receivables just because they are large, and it often prices the revolver at the same spread as the term loan.
Split the collateral, and each piece is financed by the lender that values it most. Asset-based lenders typically advance 80% to 90% of eligible receivables and up to 85% of the net orderly liquidation value of inventory, at a price that reflects how liquid and closely watched that collateral is. The term lender, freed from funding working capital, sizes its loan on cash flow and the hard assets. Its term loan and the revolver's availability add up to more than a single lender would usually offer, particularly for businesses with heavy receivables and inventory.
Cost follows. Suppose, for illustration, 3,000 is drawn on the asset-based revolver at a cost of 7 per 100 a year and 4,000 is borrowed on the term loan at 11 per 100. The blended cost is about 9.3 per 100 on the full 7,000. A single lender charging 10.5 per 100 on all of it costs more on every dollar, and may not lend the full 7,000 at all. The figures are illustrative; the pattern is why the structure exists. Blended cost of the capital stack works through the arithmetic.
There is a resilience benefit as well, with a limit. An asset-based revolver usually carries only a springing fixed charge coverage test, so a weak quarter on its own does not stop it funding the way a leverage covenant can stop a cash-flow revolver. But in a split-lien structure a covenant breach on the term loan is usually a default under the revolver too, so the protection is only as good as the term loan's covenants. ABL versus a cash-flow line sets out that difference.
What the intercreditor agreement has to settle
The intercreditor agreement is the contract between the two lenders. It decides where one lender's collateral ends and the other's begins, and who does what when the borrower is in trouble. Most of its terms only matter in a default, but some shape the business every month.
| Term | What it decides | What the borrower should watch |
|---|---|---|
| Collateral definitions | Which assets and proceeds belong to each pool | Proceeds from selling equipment landing in the swept account and paying the revolver instead of the term loan |
| Cap on the ABL debt | How much revolver debt the term lender will sit behind | A cap too tight stops the line growing with sales; ask for headroom above the commitment |
| Cap on the term debt | How much term debt the ABL lender will sit behind | Room for an add-on acquisition or a capital expenditure loan |
| Access and use rights | The ABL lender's right to use the plant and equipment for a period after default to finish and sell inventory | The length of the access period and who bears the costs |
| Intellectual property license | The ABL lender's right to use trademarks to sell branded inventory | That the license survives any sale of the trademarks |
| Enforcement standstill | How long the second-priority lender must wait before acting against the other's collateral | Whether a standstill buys time for a negotiated solution |
| Amendment limits | What each lender may change without the other's consent | Whether one lender needs the other's consent to raise its advance rates or pricing, or to change its maturity, which decides whether a routine amendment needs both lenders |
| Bankruptcy terms | Consent to financing in bankruptcy, use of cash collateral, credit bidding | Rarely negotiated by the borrower, but they shape any restructuring |
| Purchase option | The right of one lender to buy the other out after a default | An exit if the lenders disagree about how to handle a problem |
The borrower usually signs an acknowledgment rather than negotiating the agreement, and it pays both lenders' legal fees. That is no reason to leave it unread. The caps and the amendment limits govern what the business can do for years. The glossary entry on the intercreditor agreement and the subordination agreement explain how the two documents differ.
Where borrowers get hurt
Split-lien structures fail borrowers in predictable ways, nearly all of them written into the documents at closing:
- A cap that the business outgrows. If the intercreditor caps revolver debt at the original commitment, a business that doubles its receivables cannot grow its line without the term lender's consent, which it may price.
- Springing maturity. Asset-based lenders often insist that their revolver matures early if the term loan is not refinanced some months before its own maturity. A term loan left too late can pull the revolver down with it.
- Two sets of covenants, linked. A default under one facility is usually a default under the other through a cross-default clause. The borrower has to manage both sets of tests, not whichever is looser.
- Asset sales. Selling surplus equipment produces term-priority proceeds that the term lender may require as a prepayment, even though the business meant to keep the cash.
- Refinancing one piece. A new lender replacing either facility has to accept the existing intercreditor agreement or negotiate a new one with the lender that stays. That can slow or block a refinancing that would otherwise be simple.
- Double reporting. Borrowing base certificates and field exams for one lender, compliance certificates for the other, on different calendars.
The intercreditor is negotiated between the lenders, but the borrower lives under it for the life of both loans. Read it before signing, not after the first dispute.
When a split-lien structure fits, and when it doesn't
It fits best where the balance sheet carries two kinds of real collateral at once: meaningful receivables and inventory, and meaningful equipment, real estate or brand value. Manufacturers, distributors with owned facilities, and businesses with valuable trademarks are typical. It is also common in acquisitions, where a term lender funds the purchase price and an asset-based lender provides working capital; see using a revolver in an acquisition.
It fits less well when the facility is small enough that two lenders, two sets of counsel and an intercreditor agreement cost more than the pricing saves, or when the business is asset-light and its receivables would support only a small borrowing base. The alternatives:
- One asset-based lender with a term piece. Many asset-based lenders add a machinery and equipment tranche, and sometimes a real estate piece, inside one facility. Less total debt, one set of documents.
- A unitranche with a first-out revolver. One loan document, with the lenders splitting the economics among themselves. See first-out, last-out unitranche and senior versus unitranche.
- One bank doing both. Simplest of all, where a bank's appetite covers the whole need.
Preparing the file for two lenders
Both lenders read the same business from different angles, and the file has to serve both. The asset-based lender works from the line-of-credit checklist: receivables aging by customer with days outstanding, payables aging, balance sheet, profit and loss, year-to-date results, the debt schedule and existing UCC liens, and an inventory report if inventory is in the base. The term lender reads the same statements for earnings and debt service, and adds whatever supports the value of its own collateral, such as an equipment list or an existing appraisal.
Transparent's book holds 235 lenders that write asset-based loans and lines and 1,148 that write term and private credit. The lender package sets out the collateral by pool, with each asset class and its value on the same page, so both lenders price from one set of numbers and the split is agreed on facts rather than argued between counsel after the term sheets are signed.
Common questions
- Is a split-lien structure the same as a second lien loan?
- No. In a second lien loan one lender is junior on every asset. In a split-lien structure each lender is first on its own pool of collateral and second on the other's, and neither is subordinated in right of payment.
- Who negotiates the intercreditor agreement?
- The two lenders and their counsel. The borrower usually signs an acknowledgment and pays the legal fees, but it should review the caps, amendment limits and asset sale terms, because they govern what the business can do.
- Can I refinance only one of the two loans?
- Yes, but the new lender has to accept the existing intercreditor agreement or agree a new one with the lender that stays. Allow for that negotiation in the refinancing timetable.
- What happens to the money if I sell equipment?
- Equipment is usually term-priority collateral, so the proceeds may have to prepay the term loan, even if they arrive in an account the asset-based lender sweeps. Agreements normally allow small disposals and reinvestment within limits.
- Is a split-lien structure worth it for a smaller company?
- It depends on whether the extra debt and lower pricing outweigh the cost of two lenders, two sets of reporting and the intercreditor legal work. For smaller facilities, one lender with an equipment tranche is often the better answer.