Senior Debt

When a company fails, its assets are used to repay its creditors in a set order. Senior debt sits at the top of this order. It is often secured, meaning it is backed by specific assets, such as property, equipment or receivables, which the lenders can claim if the company defaults.

Because senior debt is more likely to be repaid, it carries lower risk for lenders and usually pays lower interest rates than subordinated or mezzanine debt.

Common forms of senior debt include bank loans, revolving credit facilities and senior secured bonds. For example, in a leveraged buyout, the senior debt might be a term loan from banks secured on all of the company's assets, sitting ahead of subordinated bonds and equity in the order of repayment.

Senior debt agreements often include covenants that restrict the borrower's actions and give lenders early warning of problems. Senior lenders often have significant influence in restructurings, since they are first in line to recover their money. Recovery rates for senior secured debt in defaults have historically been higher than for subordinated debt.