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What is senior debt?

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Senior debt is debt that is unsubordinated to other debt of the borrower.  It ranks ahead of other secured debt, unsecured debt and subordinated debt with regard to claim on the borrower’s earnings and assets.

Senior term debt is secured and unsubordinated medium- to long-term debt that is collateralized by a first lien on the borrower’s noncurrent assets.  It is commonly lent against the collateral value of the pledged capital assets, usually machinery, equipment or real estate.

When a revolving facility is secured, it is senior revolving credit that takes a first lien on trade receivables and inventory – the most liquid forms of collateral.  When provided in leveraged finance, as senior debt it shares the security with the senior term debt.

Recovery Rate of US Secured Debt 1987-2007
Financial Instrument Mean %
Secured Revolving Credit 80.2%
Secured Term Loans 71.2%
Senior Secured Bonds 55.9%
Source: S&P’S

Second lien debt is a senior secured term loan that ranks pari passu with the senior debt of the borrower in terms of payment but after the unsubordinated senior debt with regard to collateral upon the borrower’s liquidation through enforcement of its security package.  As secured debt, it ranks ahead of all unsecured debt (high-yield bonds, PIK notes) but is contractually subordinated to senior debt.  In US leveraged finance, it is often seen in the finance structure as Term Loan B (TLb).

Secured lending enables the lender to take legal action to reclaim and sell the assigned or pledged collateral in the event of the borrower’s default on the debt.  Secured debt generally has full priority over any unsecured claim in bankruptcy but only up to the value of the collateral.  Any portion of the secured lender’s claim that is not satisfied by the assets in which the security interest was taken ranks as any other unsecured, unsubordinated debt, having general creditor status.

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