What Is Senior Debt?
Senior debt is borrowing that has the highest-priority claim on a company's cash flows and assets. If the company runs into trouble, senior lenders are paid in full before subordinated creditors, preferred shareholders, or common shareholders receive anything.
Senior debt is frequently secured, meaning it is backed by specific collateral such as receivables, inventory, equipment, or a pledge of the company's stock. Typical forms include revolving credit facilities, term loans, and senior secured notes.
Senior vs. Subordinated Debt
The distinction between senior and subordinated debt shows up in recoveries. In a bankruptcy waterfall, sale proceeds flow first to secured senior lenders up to the value of their collateral, then to unsecured senior claims, then to subordinated debt, and only afterward to equity.
Because senior lenders take the least risk, they earn the lowest returns, often a floating benchmark plus 2 to 4 percent for leveraged borrowers, and they typically demand the strongest covenant protections. Subordinated lenders may earn 8 to 12 percent or more to compensate for standing behind them in line.
Example
Suppose a company with 300 million dollars of senior secured debt and 200 million dollars of subordinated notes goes bankrupt, and its assets are sold for 350 million dollars. Senior lenders recover their full 300 million dollars, a 100 percent recovery.
The remaining 50 million dollars goes to subordinated holders, who recover only 25 cents on the dollar, and equity holders receive nothing. That same 500 million dollars of total debt produced completely different outcomes depending purely on seniority.
Why It Matters
Seniority determines pricing, recovery expectations, and credit ratings, and it shapes how much total debt a company can support. In LBO structures, senior debt typically provides the largest and cheapest slice of financing, often 3 to 4 turns of EBITDA.
Credit analysts, leveraged finance bankers, and distressed investors all analyze seniority and collateral first when sizing up a debt investment, because where you sit in the waterfall drives what you get back when things go wrong.
