What it means
When a company owes money to several lenders, the order in which they are repaid depends on who holds the strongest claim over the company's assets. The first lender in line is repaid before the second, and so on.
Being primed means that someone else has been placed ahead of you in that line. This usually happens when a company is in financial trouble and needs new money.
A new lender may refuse to lend unless it gets a first claim over the assets, and in some insolvency systems a court can authorise that ranking even over the objections of existing lenders. The existing lender is then primed.
The result is that the existing lender's recovery depends on how much the assets are worth after the new priority loan is repaid. If the assets are valuable enough, the primed lender may still be repaid in full.
If they are not, the primed lender absorbs the shortfall. Courts and contracts offer some protection.
Courts typically allow priming only if existing lenders are given adequate protection, meaning some assurance that the value of their claim will not be eroded. Loan agreements may also ban or limit new priority debt unless the existing lenders agree.
Lenders can also protect themselves in advance by including clauses that require their consent before any new debt ranks ahead of theirs. Such clauses are a standard feature of loan agreements, and they give the lender a seat at the table when priming is proposed.
Credit teams read these clauses closely before approving a loan. A word of caution on usage: the word "primed" is also used informally in markets to mean prepared or ready, as in a market primed for a rally.
In debt and credit documents, however, it nearly always refers to this loss of priority, so read the context before drawing conclusions.
In practice
Real-world examples.
Example
A retailer files for court protection and obtains emergency financing that ranks first over its stock and property. Its previous bank is primed and now relies on the assets being worth more than the new loan plus its own claim. The retailer's other creditors also rank behind the new loan.
Example
A manufacturing company's loan agreement forbids new debt that ranks ahead of the existing bank. When management proposes one anyway, the bank's consent is required to avoid being primed. A waiver of that clause usually comes with a fee or higher interest.
Example
A lender reviewing a struggling borrower's file builds a table showing its recovery if a priority loan of $3,000,000 is added. The analysis shows its recovery falling from 100% to 75% in a weak sale, and the lender negotiates extra protections. The negotiated protections include tighter reporting and a cap on the size of the new loan.
Formula
Calculation
Recovery for a primed lender = The lower of (Existing claim) and (Asset value - Priming loan).
A company's assets, which secure its existing first-ranking lender, are worth $10,000,000. The existing lender is owed $6,000,000. The company then borrows $4,000,000 under a new loan that ranks ahead of the existing lender, so the existing lender is primed.
If the assets still sell for $10,000,000, the priming lender takes $4,000,000 first and the primed lender takes the remaining $6,000,000, so it is repaid in full. If the assets sell for only $8,000,000, the priming lender takes $4,000,000 and the primed lender recovers $8,000,000 - $4,000,000 = $4,000,000 out of $6,000,000, which is 66.7%. Without the priming loan, it would have recovered the full $6,000,000, so priming cost it $2,000,000 in this case.Case study
Seen in the real world.
Westbrook Fabrication is a fictional steel processor whose assets secured a $6,000,000 loan from its long-standing bank. When orders collapsed, the company needed $4,000,000 of emergency funding and could find a lender only if that lender ranked first.
The illustrative bank was asked to consent. Its credit team compared the likely sale value of the assets, around $10,000,000 in a normal sale but $8,000,000 in a rushed one, and saw that priming could cost it up to $2,000,000.
The bank agreed on condition of regular reporting, a share of the new interest and a cap on the size of the priority loan. In the fictional outcome, the company stabilised and the bank was repaid in full, though it had taken a real risk by accepting the priming.
Watch out
Common mistakes.
- Assuming that being primed always means a loss, when a lender may still be repaid in full if the assets are valuable enough.
- Ignoring loan agreement clauses that restrict new priority debt, which are the main protection against priming.
- Confusing the informal use of primed meaning ready with the credit meaning of lost priority.
Questions
People also ask.
What does it mean for a lien to be primed?
It means another lien now ranks ahead of it, so it is paid only after the new priority claim is satisfied.
Can a lender stop itself being primed?
Often through contract terms and by objecting in court, but in some cases a court can approve priming if the lender is adequately protected.
How does a lender measure the risk?
It compares the asset value, the new priority loan and its own claim, and calculates recovery under different sale prices.
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