Senior Debt

For corporate borrowers, senior debt is repaid first and has priority over unsecured debt if a company declares insolvency. The senior debt will be repaid from any leftover cash or the sale of certain assets or securities. In general, debt is divided into two segments, either senior or subordinate.

Senior Secured vs Senior Unsecured Debt

Although debt is divided into different segments, senior debt can also be defined as either secured or unsecured debt.

  • Senior Secured Debt: A creditor requires some form of collateral that is pledged by the borrower. This, in some instances, is a safer and more affordable way to acquire a large loan.
  • Senior Unsecured Debt: The debt is not secured by any form of collateral, it has a higher risk for the lender, but for the borrower, it means if they default on their loan, none of their assets will be repossessed by the borrower.

For the most part, it’s important to remember that senior debt has a higher priority than other forms of debt. If a company defaults on its repayments of loans or has to declare insolvency, the senior form of debt is to be repaid first before any other outstanding forms of debt.

Senior Debt consists of the following:

  • Capital structure: The structure in which a company or investor is financed either through equities, debts, or credits from a financial provider.
  • Payment Schedule: The predetermined schedule through which a company or person makes debt and interest payments to lenders.
  • Senior Lender: A senior lender has a lower form of risk, they generally offer a lower and more affordable form of funding through down payments or savings available in the company.
  • Tranches Priority: This refers to the period in which a borrower agrees to secure and make capital repayments to the senior lenders and the senior debt.

Published:

05/10/2022

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