Two-tier debt structure: First Lien 200 and Second Lien 100. Where does the Second Lien trade in this setup?

• A. 50 cents on the dollar
• B. 100 cents on the dollar
• C. 75 cents on the dollar
• D. 25 cents on the dollar

Answer: (A)

Recovery in a two-tier debt setup is determined by the waterfall: the senior first lien gets paid first from any realized value, and the second lien is paid only from what remains. That means the price of the second lien reflects its expected recovery after the senior claim is satisfied.

Here, the first lien is 200 on par, the second lien is 100 on par. If a distressed sale can generate, say, 250 in value, the first lien would capture 200, leaving 50 for the second lien. Since the second lien’s face value is 100, recovering 50 equates to 50 cents on the dollar. So the second lien tends to trade around half of its par value in this kind of setup, given typical distress scenarios. If the total recovery were enough to cover more of the second lien, its price would rise toward par; if less, it would fall further.