Financial complexity hit its height in 2008. The second-lien loan market has grown rapidly in the past few years, rising from an issuance of $300 million in the late 1990s to more than $40 billion in 2007. The energy sector saw its respective share in the growth in second-lien loans.

Bankruptcy is back in vogue and many U.S. E&P and oilfield-service companies will experience in-court and out-of-court workouts with natural gas prices falling below $4 per Mcf. This blog report is based on an examination of the impact that second-lien loans may have on future bankruptcies by studying 16 bankruptcies that have involved second-lien loans.

Based on a careful study of most or all of the recent bankruptcy cases involving second-lien loans, the finding is that inter-creditor agreements between first- and second-lien loans have had a limited impact, smoothing conflicts between first- and second-lien lenders. Inter-creditor agreements have been used primarily as a negotiating lever rather than the determinant of reorganization results.

My research also reveals that bankruptcies with second-lien loans mostly involve debtors with over-encumbered balance sheets. In these cases, second-lien loans have become the fulcrum of impairment. The result is that second-lien loans have created significant barriers to reorganizations by: (1) limiting free assets to operate in bankruptcy and collateralize debtor-in-possession (DIP) financing; (2) limiting reorganization options by making cram-downs more difficult; and (3) introducing new hedge-fund-related complexities in the reorganization process.

The financial-advisory services firm Accumyn has used a number of tactics to work around these problems. Tactics include pre-negotiated plans, creative DIP financing solutions, asset sales, first-lien-loan buyouts, rights offerings, valuation litigation and cross-lien ownership.

--David N. Eliff

About the author: David N. Eliff is a CPA and certified in financial forensics (CFF) by the American Institute of CPAs. He is a managing director of Accumyn Consulting, a Houston-based financial-advisory services firm. David is a recognized leader in corporate restructuring and turnaround management, with 25 years experience as a chief financial officer and in the Big 4 restructuring practices. He can be reached at and at 713-430.6895.