Senior Debt

What Is Senior Debt?

Senior debt is borrowed money that a company must repay first assuming it leaves business. Each type of financing has an alternate priority level in being repaid on the off chance that the company leaves business. On the off chance that a company fails, the issuers of senior debt, which are much of the time bondholders or banks that have issued revolving credit lines, are probably going to be repaid, followed by junior or subordinated debt holders and hybrid debt instruments, for example, convertible notes, then preferred stock holders. Common stock holders are last on the rundown.

How Senior Debt Works

Senior debt is a company's most memorable tier of liabilities, ordinarily secured by a lien against a collateral of some sort. Senior debt is secured by a business for a set interest rate and time span. The company gives customary principal and interest payments to lenders in light of a preset schedule. This makes the debt safer, yet in addition orders a lower return for lenders. Senior debt is generally funded by banks.

The banks take the lower risk senior status in the repayment order since they can generally stand to acknowledge a lower rate given their low-cost source of funding from deposit and savings accounts. Likewise, regulators advocate for banks to keep a lower risk loan portfolio.

Senior debt holders might have the option to voice their viewpoints on how much subordinated debt a company expects. All assuming that the company becomes insolvent, carrying too much debt might mean the business can't pay its creditors. Thus, senior debt holders ordinarily need to keep other debt at the very least.

Secured senior debt is backed by an asset that was pledged as collateral. For instance, lenders might place liens against equipment, vehicles or homes while giving loans. On the off chance that the loan goes into default, the asset might be sold to cover the debt. Then again, unsecured debt isn't backed by an asset pledged as collateral. On the off chance that a business becomes wiped out, unsecured debt holders file claims against the company's overall assets.

Senior versus Subordinated Debt

The difference between subordinated debt and senior debt is the priority wherein the debt claims are paid by a firm in bankruptcy or liquidation. In the event that a company has both subordinated debt and senior debt and needs to file for bankruptcy or face liquidation, the senior debt is paid back before the subordinated debt. When the senior debt is totally paid back, the company then, at that point, repays the subordinated debt.

In this way, on the off chance that a company files for bankruptcy, senior debt claims are paid first. Any remaining debt is subordinated (junior). Collateral from asset-backed debts might be sold to pay off senior secured debt. Senior unsecured debt is then paid utilizing other company assets. In the event that any assets remain, subordinated debt is paid. Thus, subordinated creditors might lose some or the entirety of the principal and interest payments that they are owed.

Illustration of Senior Debt

In July 2016, Alejandro Garcia Padilla, legislative head of Puerto Rico, announced that Puerto Rico would default on $779 million in naturally backed general obligation debt, its most senior debt. The Commonwealth had been zeroing in on covering services required for its residents as opposed to paying its debt obligations. The previous month, President Barack Obama endorsed into law a bill giving a debt restructuring process, which stopped any litigation that would have come about because of the default.

A federal oversight board was likewise carried out to oversee Puerto Rico's finances. The overall obligation (GO) debt is a category of debt that the United States had not defaulted on in many years. Dissimilar to regions, Puerto Rico isn't covered by Chapter 9 bankruptcy laws.

Features

• Senior debt has the highest priority and hence the lowest risk. Subsequently, this type of debt normally conveys or offers lower interest rates.
• Subordinated debt conveys higher interest rates given its lower priority during payback.
• Senior debt will be debt and obligations which are focused on for repayment on account of bankruptcy.
• Senior debt is most frequently secured by collateral, likewise making it moderately safer.