What is Senior Debt?

When is the risk of default most prevalent?

For borrowers with very high credit ratings, the risk of default and liquidation is very much distant. However, for borrowers in the non-investment grade, the risk of default is greater.

Debt seniority will play a larger role in the default-risk analysis lenders use to assess the investment proposition.

What are the different types of senior debt?

Senior secured formats – The debt of senior secured creditors is secured by collateral contractually pledged by the borrower. This is therefore considered safer and cheaper to use.

Senior unsecured debt – This type of debt is not secured by a specific type of asset.

Why is senior unsecured debt issued the most?

The reason is because banks and companies don’t like to or cannot encumber the assets side of the balance sheet by tying collateral to huge amounts of liabilities.

However, this is of great risk and investors tend to be wary of companies with heavily-encumbered balance sheets.

What is the repayment priority list?

The more senior secured debt is repaid first, and the creditors further down the repayment queue paid after. It is repaid in the following list:

• first-lien
• second-lien
• lower security

Why are second-lien facilities popular?

Second-lien tranches give private equity acquirers the option of adding a layer of more subordinated debt that boosts leverage. Also, they’re considered as an alternative funding option to high-yield bonds or mezzanine debt.