======First-to-Lien (FTL)======
First-to-Lien (FTL) debt is a type of [[senior secured debt]] that gives the lender the primary legal claim, or [[lien]], on a borrower's specific assets. Think of it as holding the number one ticket in a raffle for the company's valuables. If the company can't pay its bills and goes into [[default]], the FTL lender is first in line to be repaid from the sale of the pledged [[collateral]]—be it real estate, equipment, or inventory. This "first-out" position makes it the safest form of debt in a company's [[capital structure]], standing ahead of [[second-lien debt]], [[unsecured debt]], and, of course, equity holders. Because of this superior safety, FTL loans typically offer lower interest rates compared to riskier, more junior debt. For investors, particularly those with a value-oriented mindset, understanding the FTL position is crucial for assessing downside risk and the true [[margin of safety]] in a credit investment.
===== Why FTL Matters to Investors =====
The concept of "first" is everything here. It's not just about getting paid; it's about getting paid //before// anyone else. This priority profoundly impacts the risk and reward profile of an investment.
==== The Safety Net of Seniority ====
Imagine a company's obligations as a ladder, known as the capital structure or "capital stack." In a [[bankruptcy]] or liquidation, the company's assets are used to pay off lenders and owners in a strict pecking order, from top to bottom.
  - 1. **First-Lien / Senior Secured Debt:** This is the top rung. FTL lenders get the first bite of the apple. They are paid from the proceeds of the specific collateral they have a lien on.
  - 2. **Second-Lien / Junior Debt:** These lenders get paid from the collateral proceeds only //after// the FTL holders are made whole.
  - 3. **Unsecured Debt:** These creditors have no specific collateral claim and are paid from any remaining assets.
  - 4. **[[Preferred Stock]] Holders:** Next in line after all debt is paid.
  - 5. **[[Common Stock]] Holders:** The last to receive anything, if there's anything left.
For a value investor, the FTL position provides a powerful margin of safety. You're not just betting on the company's success; you're structurally protected against its failure. It's the financial equivalent of having a VIP ticket that gets you to the front of the buffet line while everyone else has to wait.
==== Assessing the Collateral ====
A first lien is only as good as the assets it's attached to. A front-row ticket to a terrible show is still a ticket to a terrible show. Therefore, a smart investor doesn't stop at confirming FTL status. The real work is in analyzing the collateral itself.
Key questions to ask include:
  * **What is it?** Is the collateral easily sellable, like prime real estate or a fleet of standard trucks? Or is it something obscure, like custom-built machinery for a niche industry that has no alternative use?
  * **What is it //really// worth?** An investor must estimate the asset's [[liquidation value]], not its [[book value]]. What could you get for it in a forced sale tomorrow, not what the company's accountants say it's worth today.
  * **How much coverage is there?** The [[loan-to-value (LTV) ratio]] is critical. An FTL loan of $60 million against collateral valued at $100 million (60% LTV) offers a much thicker cushion than a $90 million loan against the same assets (90% LTV). A lower LTV means the asset's value can fall significantly before the lender's principal is at risk.
===== FTL in Practice: Where Do You Find It? =====
Most ordinary investors won't be lending directly to companies to secure an FTL position. Instead, exposure is typically gained through specialized investment funds and companies that do this for a living.
  * **[[Business Development Companies (BDCs)]]:** These are publicly traded companies that invest in the debt and equity of small and mid-sized private businesses. A significant portion of their portfolios often consists of senior secured loans, including FTL debt.
  * **[[Private Credit]] Funds:** These funds operate outside the public markets, lending directly to companies. They are major players in the FTL space, though access may be limited to accredited or institutional investors.
  * **Senior Loan or "Bank Loan" Funds/ETFs:** These are mutual funds and ETFs that buy and hold a portfolio of senior secured loans made to corporations, most of which have first-lien status.
  * **[[Collateralized Loan Obligations (CLOs)]]:** These are complex securities that bundle hundreds of corporate loans (mostly FTL) into a single investment, which is then sliced into tranches of varying risk.
===== The Value Investor's Takeaway =====
Investing in FTL debt is the quintessential "heads I win, tails I don't lose much" proposition that value investors love. It's an investment strategy focused on **capital preservation** and generating steady, predictable income rather than chasing spectacular gains.
The core appeal is the robust downside protection. The critical question for a value investor is always, "What is my risk of permanent capital loss?" With a well-structured FTL loan backed by high-quality collateral and a conservative LTV, the answer is "significantly lower than for almost any other security in that company." It’s a disciplined approach that prioritizes getting your money back over getting a home run.