What Does Primed Mean?
In other words, a lender is considered primed when they are surpassed by another lender with respect to their priority status regarding the collateral of a secured loan. This situation is also known as lien priming, because there are usually liens or other restrictions placed on the collateral in question.
- A lender is primed if their priority status with respect to a debtor's collateral is surpassed by another lender.
- Ensuring a high priority status is an important way for lenders to reduce their risk.
- In some cases, a lender might allow themselves to be primed if they believe doing so will ultimately maximize their chances of being repaid. These situations typically arise when a company is facing bankruptcy or in the midst of restructuring.
Understanding Being Primed
When dealing in secured loans, different lenders will enjoy different levels of priority with respect to the collateral assets of the borrower. In the event of default, creditors with the highest priority will be the first to be repaid using the borrower's collateral. If the collateral is insufficient to repay the totality of the borrower's loans, then those creditors with relatively low priority may receive limited or even no repayment.
Because of this context, lenders are careful to ensure that their level of priority with respect to the borrower's collateral will not be adversely affected by any new loans that might be obtained by the borrower in the future.
In some cases, however, a borrower may be forced to seek new loans in order to afford their existing loans. The lenders available to provide these loans, however, may insist on receiving a higher priority status than the existing creditors, as a condition for extending this new and potentially risky loan. In those situations, the older lenders may feel that it is better to be primed than to risk the borrower defaulting on their debts altogether.
In some cases, lenders can be forced to accept being primed even if they do not provide any explicit permission. These circumstances usually arise in situations where the borrower is in bankruptcy and is being effectively managed by a court process or trustee. In order for the court to approve this measure, the borrower would need to meet various requirements.
Real World Example of Being Primed
Banks are more likely to be primed in situations where the borrower is facing significant financial duress. For example, consider the case of a company that files for bankruptcy and therefore finds itself operating as a debtor in possession (DIP).
In this situation, the company remains in control of its assets and is required to seek DIP financing, in which a new lender agrees to extend new financing to the company in distress. This type of financing usually affects the established priority of the existing lenders, causing old lenders to lose ground relative to the DIP lender.
Under these difficult circumstances, the existing lenders might agree to being primed if they believe that the new DIP financing will allow the bankrupt company to recover. If on the other hand they refuse to be primed, the company may be forced to liquidate in a less orderly manner and potentially repay even less of their initial loans.