Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Senior Debt

What it is:

Senior debt is debt that is first to be repaid, ahead of all other lenders or creditors, in the event of a borrower’s bankruptcy.

How it works (Example):

For example, if Company XYZ issues bonds, the bondholders are creditors who are senior to Company XYZ's shareholders, for example. This means that should Company XYZ go bankrupt, the bondholders are entitled to repayment before the shareholders are.

Let’s say that Company XYZ needs more capital now, and so it borrows money from Bank ABC. Who gets paid first now? The bondholders or Company XYZ? [Bank ABC, you mean?] It depends on what Company XYZ negotiates with Bank ABC, but it is likely that Bank ABC is subordinate to the bondholders, meaning that if Company XYZ goes belly up, the bondholders get paid first, then Bank ABC, then the shareholders (if there’s anything left).

Why it Matters:

Senior lenders get their hands on leftover cash first in the event of bankruptcy. Accordingly, subordinated lenders (those lenders further down in the pecking order) are more likely to get stiffed. This is why some lenders might require senior status in order to make a loan (meaning that they must be first in line). In our example, Bank ABC may charge a higher interest rate on the loan because of its subordinated status and thus added risk of not being able to get its hands on any of the scraps if Company XYZ goes bankrupt.

Related Terms View All
  • Auction Market
    Though most of the trading is done via computer, auction markets can also be operated via...
  • Best Execution
    Let's assume you place an order to buy 100 shares of Company XYZ stock. The current quote...
  • Book-Entry Savings Bond
    Savings bonds are bonds issued by the U.S. government at face values ranging from $50 to...
  • Break-Even Point
    The basic idea behind break-even point is to calculate the point at which revenues begin...
  • Calendar Year
    If Company XYZ starts its fiscal year on January 1 and ends its fiscal year on December...