Senior Debt

Senior debt refers to a type of debt that holds priority over other obligations in a company's capital structure. In the event of liquidation or bankruptcy, senior debt holders are repaid first from the company’s assets, making it a lower-risk investment compared to subordinated or junior debt.

Characteristics of senior debt

Secured debt

Senior debt is often secured debt, meaning it is backed by specific collateral such as property, equipment, or receivables. This reduces the lender’s risk, as they have a claim on these assets if the borrower defaults.

Principal and interest payments

Borrowers must make regular principal and interest payments on senior debt. Failure to meet these payments can lead to default, allowing lenders to seize the secured assets.

Interest rates

Since senior debt carries lower risk, it generally has lower interest rates compared to subordinated debt. This makes it a cost-effective financing option for companies. However, unsecured senior debt—which is not backed by collateral—may have higher interest rates to compensate for the increased risk.

Debt instruments

Common debt instruments for senior debt include term loans and revolving credit facilities. These provide companies with flexibility in managing their capital needs and funding growth.

Senior debt vs subordinated debt

Understanding the difference between senior and subordinated debt is essential in corporate finance. Subordinated debt, also known as junior debt, is repaid only after senior debt holders have been satisfied. This higher risk means subordinated debt often carries higher interest rates to attract investors seeking higher returns.

Senior debt plays a critical role in a company's capital structure, offering lenders reduced risk through priority repayment and, in many cases, secured debt backed by assets. This combination of security and priority makes senior debt an attractive financing option for both businesses and investors.