Senior Note
What Is a Senior Note?
A senior note is a type of bond that overshadows different debts if the company declares bankruptcy and is forced into liquidation. Since they carry a lower degree of risk, senior notes pay lower rates of interest than junior bonds.
Figuring out the Senior Note
Senior notes normally have more limited maturity times than different bonds. The time lengths differ as per the issuer:
- Corporate senior notes mature in 10 years or less
- Municipal bond senior notes mature in one year or less
- U.S. Treasury senior notes mature in two to 10 years
Senior notes could possibly be backed by specific assets that are pledged as collateral. Hence, if the company is forced into liquidation, holders of unsecured senior notes may not recover their principal and interest in full.
Convertible senior notes might be held to maturity or changed over into shares of the company's common stock.
In the event that a liquidation happens, secured debt is repaid first by selling the collateral backing the debt, then senior note-holders are paid, then, at that point, holders of other unsecured debt, assuming any assets remain.
How Bonds Are Rated
Standard and Poor's and Moody's Investors Service, the two biggest bond rating firms, rank bonds in view of their judgment of the issuer's ability to repay the principal and the interest payments on time. The rating for a senior note, as different bonds, depends on the creditworthiness of the issuer, including its ability to produce predictable earnings with which to finance debt payments.
Formula for Rating
A commonly-utilized formula that rating agencies utilize to examine creditworthiness is the interest coverage ratio. This formula is defined as the ratio of earnings before interest and taxes separated by interest expense.
This ratio records how much in earnings the company generates, as a different of interest expense. The bigger the ratio, the more revenue a firm generates that can be utilized to make interest payments.
Convertible Senior Notes
A few senior notes are convertible into shares of the issuer's common stock. In that case, investors might decide to hold senior notes until maturity or to change over the notes into a predetermined number of common stock shares.
For instance, we should expect that a $1,000 senior note has a conversion option that permits an investor to change over their holding into 20 shares of common stock. On the off chance that the market price of the common stock is $60 per share, the investor can change over the senior notes into shares worth $1,200. The investor then, at that point, claims equity in the company as opposed to possessing debt.
Senior Note Vs. Senior Debt
A senior note isn't exactly the same thing as senior debt, albeit the terms are frequently utilized conversely. Senior debt is a more extensive term that is utilized to portray a company's all's debts that have priority status in the event of bankruptcy. Most senior debt is collateralized.
Features
- That makes senior notes safer than different bonds.
- That greater level of safety means investors earn marginally lower interest rates.
- Senior notes are bonds that must be repaid before most different debts if the issuer declares bankruptcy.
