Senior Debt
Quick Definition
Debt that takes priority over other obligations in the event of default or bankruptcy, giving holders first claim on the issuer's assets.
Key Takeaways
- Highest priority claim on assets in bankruptcy
- Senior secured debt has the best recovery rates (50–70% historically)
- Lower yields than subordinated debt due to lower risk
- Critical distinction in credit analysis and capital structure
What Is Senior Debt?
Senior debt refers to borrowings that have the highest priority claim on a company's assets and cash flows in the event of default or bankruptcy. In the capital structure hierarchy, senior secured debt (backed by specific collateral) is repaid first, followed by senior unsecured debt, then subordinated (junior) debt, preferred equity, and finally common equity. Because senior debt holders face the lowest loss-given-default, these instruments typically carry the highest credit ratings and lowest yields within a company's capital structure. Recovery rates for senior secured debt historically average 50–70%, compared to 20–40% for subordinated debt. The distinction between senior and subordinated debt is critical for credit analysis and bond pricing.
Senior Debt Example
- 1A company's senior secured bank loan at 5% sits ahead of its 7% subordinated bonds in the repayment hierarchy
- 2In Lehman Brothers' bankruptcy, senior debt holders recovered about 28 cents on the dollar while subordinated holders received far less
Related Terms
Subordinated Debt
Debt that ranks below senior debt in repayment priority, offering higher yields to compensate for the greater risk of loss in default.
Debenture
An unsecured bond backed only by the issuer's general creditworthiness and reputation, without specific collateral pledged.
Bond Indenture
The legal contract between a bond issuer and bondholders that specifies the bond's terms, covenants, and the rights and obligations of each party.
Default Risk
The probability that a bond issuer will fail to make scheduled interest or principal payments, potentially resulting in partial or total loss for bondholders.
Bond
A fixed-income debt security where investors loan money to an issuer in exchange for regular interest payments and return of principal at maturity.
Treasury Bond (T-Bond)
A long-term U.S. government debt security with a maturity of 20 or 30 years, paying semiannual coupon interest.
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