Primed

What's the significance here?

In finance, being "primed" is a conversational term that alludes to the situation where the seniority position of a lender with respect to a secured loan is supplanted by another lender.

At the end of the day, a lender is viewed as primed when they are outperformed by one more lender with respect to their priority status in regards to the collateral of a secured loan. This situation is otherwise called lien priming, since there are typically liens or different limitations put on the collateral being referred to.

Understanding Being Primed

While dealing in secured loans, various lenders will appreciate various levels of priority with respect to the collateral assets of the borrower. In the event of default, creditors with the highest priority will be quick to be reimbursed utilizing the borrower's collateral. Assuming the collateral is inadequate to repay the entirety of the borrower's loans, then those creditors with relatively low priority might receive limited or even no repayment.

Due to this unique circumstance, lenders are careful to guarantee that their level of priority with respect to the borrower's collateral won't be adversely impacted by any new loans that may be gotten by the borrower later on.

At times, nonetheless, a borrower might be forced to look for new loans to manage the cost of their existing loans. The lenders accessible to give these loans, in any case, may demand getting a higher priority status than the existing creditors, as a condition for expanding this new and possibly risky loan. In those situations, the more seasoned lenders might feel that it is much improved to be primed than to risk the borrower defaulting on their obligations by and large.

Bankruptcy Proceedings

At times, lenders can be forced to acknowledge being primed even on the off chance that they give no explicit permission. These conditions as a rule emerge in situations where the borrower is in bankruptcy and is really managed by a court cycle or trustee. For the court to endorse this measure, the borrower would have to meet different requirements.

Real World Example of Being Primed

Banks are bound to be primed in situations where the borrower is facing huge financial duress. For instance, consider the case of a company that documents for bankruptcy and consequently ends up operating as a debtor in possession (DIP).

In this situation, the company stays in control of its assets and is required to look for DIP financing, in which another lender consents to stretch out new financing to the company in distress. This type of financing ordinarily influences the laid out priority of the existing lenders, making old lenders lose ground relative to the DIP lender.

Under these troublesome conditions, the existing lenders could consent to being primed assuming they accept that the new DIP financing will allow the bankrupt company to recuperate. On the off chance that then again they won't be primed, the company might be forced to liquidate in a less orderly way and possibly repay even less of their initial loans.

Highlights

• At times, a lender could allow themselves to be primed in the event that they genuinely think doing so will at last expand their possibilities being reimbursed. These situations normally emerge when a company is facing bankruptcy or amidst restructuring.
• A lender is primed in the event that their priority status with respect to a debtor's collateral is outperformed by another lender.
• Guaranteeing a high priority status is an important way for lenders to reduce their risk.