> ## Content Index > Fetch the complete content index at: https://blog.financely.io/llms.txt > Use this file to discover other available public pages before exploring further. # When a FILO Tranche Is Useful in an ABL Facility - URL: https://blog.financely.io/filo-tranche-in-an-abl-facility/ - Published: 2026-11-12T18:07:42.000Z - Updated: 2026-11-12T18:07:42.000Z - Description: A FILO tranche, first-in, last-out, is an extra piece of an asset-based lending facility that is last in repayment priority and is used when the senior borrowing base or the senior commitment cannot cover the need. It usually sits inside the same credit agreement as the. - Author: Financely Debt Advisors - Tags: Asset Based Lending A FILO tranche, first-in, last-out, is an extra piece of an asset-based lending facility that is last in repayment priority and is used when the senior borrowing base or the senior commitment cannot cover the need. It usually sits inside the same credit agreement as the revolving ABL, not as a free-standing mezzanine loan, and it is repaid after the first-out lenders in a liquidation or a forced paydown. It is a structure for operating companies that have collateral, not a substitute for missing assets. Financely is an adviser and arranger, not a lender. We help borrowers decide whether a FILO, a stretch of the senior ABL, or a separate second lien is the cleaner ask, and we help prepare the file. Any tranche is subject to lender credit approval. This article does not retarget ABL lender lists. For the mechanics of the base facility, see [borrowing base calculation](https://blog.financely.io/borrowing-base-calculation/) and [asset-based lending versus cash-flow lending](https://blog.financely.io/asset-based-lending-vs-cash-flow-lending/). ## What first-in, last-out means in an asset-based facility In a standard ABL revolver, lenders advance against eligible receivables, inventory, and sometimes equipment or other assets, at agreed advance rates, and they share pro rata. A FILO adds a last-out slice. That slice may advance against the same borrowing base, against a residual portion of the base, or against a slightly different eligibility view, depending on the documents. In a downturn or a liquidation, first-out lenders are paid first from the collateral proceeds, up to their agreed position. FILO lenders are paid after that, which is why they price and diligence the residual risk more tightly. The label can hide important differences. Some FILO pieces are provided by the same agent and a subset of the syndicate. Some are provided by a specialist last-out fund. Some are documented as a separate tranche with their own commitment, conditions, and voting rights. Always read the waterfall and the voting, not only the marketing name. FILO is not the same as mezzanine, which is typically unsecured or junior capital sitting outside the ABL borrowing base, with a different intercreditor and a different return expectation. If someone uses the words interchangeably, ask them to point to the agreement. ## When the borrowing base or the senior commitment leaves a gap A FILO discussion usually starts with a gap, not with a product preference. Common gaps include: - The borrowing base, even at standard advance rates, is smaller than the working-capital need because of eligibility haircuts, concentrations, in-transit inventory, or slow-turning stock. - The senior commitment is capped below what the base could theoretically support, and the existing group will not increase the first-out line. - The company is growing or is integrating an add-on, and the senior ABL has not yet been resized. - EBITDA is weak or temporarily messy, so a cash-flow loan is hard, but the collateral is real. That situation is also discussed in [asset-based lending for companies with weak EBITDA but strong collateral](https://blog.financely.io/asset-based-lending-for-companies-with-weak-ebitda-but-strong-collateral/). If the gap is really "the assets are not there," a FILO will not invent them. Last-out lenders still need a credible residual. If the gap is "the first-out group will not stretch, but the collateral can support a carefully sized extra slice," a FILO may be worth a conversation. In-transit inventory and similar eligibility fights often sit at the centre of this gap. Those issues are described in [how ABL lenders finance in-transit inventory](https://blog.financely.io/how-abl-lenders-finance-in-transit-inventory/). Fixing reporting and eligibility can sometimes close the gap without a new tranche. That work should be done before anyone assumes a FILO is required. ## How lenders treat eligibility, advance rates, and the last-out risk First-out lenders care about whether the FILO changes their advance rates, their field-exam cadence, their dominion arrangements, or their ability to control a workout. Last-out lenders care about how much value might be left after the first-out cap, how quickly collateral converts, and whether the company's reporting can be trusted. Expect diligence on the same items a senior ABL already requires, done with less forgiveness: ageing, dilutions, appraisals, landlord waivers, inventory composition, and customer concentrations. A last-out piece that is sized off a generous management view of "total liquidation value" will be rewritten in the term sheet. Pricing, fees, and call protection are negotiated and are not stated here. They are deal-specific and should be compared against the cost of stretching the senior line or adding a second lien, including the operational cost of a more complex stack. ## FILO vs second lien vs stretching the senior ABL Three alternatives are commonly mixed together: - **Stretching the senior ABL.** Higher advance rates or looser eligibility inside the first-out facility. Simpler if the existing group will do it. Harder if the agent or the banking group has a hard cap. - **A FILO tranche.** Extra capacity in the same ABL architecture, with a last-out waterfall. Often cleaner for the borrower than a whole second credit agreement, but it still needs intercreditor-like voting and enforcement rules inside the document. - **A second-lien loan.** A separate facility, usually cash-flow or hybrid, sitting behind the ABL on a standalone intercreditor. That path is covered in [second lien financing](https://blog.financely.io/second-lien-financing/). It can be the right tool when the need is term debt rather than a larger borrowing base, or when ABL lenders will not accept a last-out partner in their own agreement. Do not choose FILO only because the acronym is familiar. Choose it when the need is incremental ABL capacity and the residual collateral can support a last-out claim. Choose a second lien when you need term money that does not belong in the borrowing base. Choose a stretch of the senior line when the existing group can actually deliver it. ## Intercreditor points the borrower should expect Even inside one credit agreement, the parties will negotiate enforcement standstills, buy-out rights, amendment voting, payment blockage, and what happens if the first-out position is refinanced. If a second lien or other debt is already in the stack, those documents have to be read together. A FILO that seems small can still need consents you do not have. Borrowers should also ask who controls the collateral account, who can amend eligibility, and whether the FILO can be prepaid independently. Those points affect both flexibility and the cost of a later refinance. ## What to put in the ABL file before anyone will discuss a FILO Put the ordinary ABL file in good order first: borrowing-base certificates that tie to the books, a recent field exam or a plan to get one, inventory appraisals where relevant, ageing, concentrations, and a 13-week liquidity view. Then add a clear statement of the gap, why a senior increase is not available or not enough, and a proposed last-out size that is modest relative to residual collateral, not a round number pulled from a wish list. If reporting has been late or inaccurate, fix that before the FILO conversation. Last-out lenders have little patience for a messy certificate, because their recovery depends on the same numbers being right. Field-exam timing should be agreed as part of the FILO discussion, not left as an afterthought. A last-out lender that has not seen a current exam, or that cannot rely on the same collateral report as the first-out group, will either decline or slow the close. Borrowers should also plan for more frequent certificates during the first months of a new tranche, because that is when reporting errors show up. None of this is a reason to avoid a FILO. It is a reason to treat the reporting pack as part of the structure, not as back-office work that can wait until after term sheets are signed. ## FAQ ### Is FILO the same as mezzanine? No. Mezzanine is typically a separate, often unsecured or junior, instrument outside the ABL borrowing base. A FILO is usually a last-out piece of an asset-based facility. Ask to see the waterfall if the labels are mixed. ### Does it sit inside the same credit agreement? Often yes, as a separate tranche. Some structures use a companion agreement. The documents, not the teaser, decide. ### What happens to the FILO in a liquidation? First-out lenders are typically paid first from collateral proceeds, up to their position. FILO lenders are paid after that, which is the last-out risk they underwrite. Exact order of payment is in the credit agreement and any intercreditor. ### Can a FILO replace a full ABL refinance? Sometimes it can fill a gap without changing the agent. It cannot fix a facility that is already mis-sized, poorly reported, or standing on weak collateral. In those cases a broader refinance may be the cleaner path. ### Does Financely provide the FILO itself? No. Financely is an adviser and arranger. Lenders decide whether to offer a first-out or last-out commitment after their own credit approval. ## Request an assessment If your senior ABL is not covering the working-capital need, send the latest borrowing-base certificate, the commitment size, and a short description of the gap. We can help you test a senior stretch, a FILO, or a second-lien alternative before you open a lender process. [Request a free estimate](https://www.financely.io/request-a-free-estimate?ref=blog.financely.io). You can also [start your engagement](https://www.financely.io/start-your-engagement?ref=blog.financely.io).