Senior debt is basically regarded as the most serious kind of debt that there is, at least from the viewpoint of the borrower, that is. To understand the concept of senior debt more thoroughly, let us first nail down the definition of senior debt.
Senior Debt According to IPIN Global, the definition of senior debt is simply money owed that possesses a greater priority than other forms of unsecured debt that is still outstanding from an issuer. This is, of course, the definition of senior debtin terms that are related purely to finance. This kind of debt comes with a higher sense of significance in the capital structure of an issuer than just subordinated debt. Senior debt frequently will be secured or even backed up by collateral that a lender has established. In most situations, this refers to all of the assets of any given entity, and it is usually utilized for credit lines that are revolving.
It is a type of corporate debt that demands priority with respect to both principal as well as interest over other types of debt and even over other kinds of equity stemming from the same issuer. If an issuer should face bankruptcy all of a sudden, the senior debt has got to be repaid first, prior to any of the creditors receive their payments.
On the flipside, debts that are regarded as more minor in importance and fail to be paid off the first time around are simply referred to as junior debt. Examples of junior debt can be such things as credit card debt, supplemental loans and even additional kinds of funds from various companies.
There is a great chance that senior debt is going to get repaid even if a company should go bankrupt. For this reason,senior debt is actually regarded as a relatively low risk concept. Consequently, a lender as well as an investor is more motivated to give up cash in order to finance this senior debt. There is also a greater chance that it is obtainable by way of lower interest rates, thus enabling a borrower to secure such a loan with greater ease. The financing of any senior debt may even be put into various categories. Some examples are unsecured versus secured and asset-based versus cash flow.
A senior debt fund is managed differently by differing organizations. For instance, some are going to set aside and then allocate particular resources into a fund for this type of debt. This is fundamentally storing money as well as additional assets that can then be utilized for paying off the debt in the event of either an economic or a financial collapse.
At the same time, a business can capitalize on a senior debt ratings system that is going to automatically line up and then pay off all of the debts within this group. Such an approach to this kind of debt can help a company if it seeks to start up a schedule for making consistent payments.