Senior debt: Difference between revisions
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It is a class of [[corporate debt]] that has priority with respect to [[interest]] and [[principal (commercial law)|principal]] over other classes of debt and over all classes of equity by the same issuer. |
It is a class of [[corporate debt]] that has priority with respect to [[interest]] and [[principal (commercial law)|principal]] over other classes of debt and over all classes of equity by the same issuer. |
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==Secured parties may receive preference to unsecured senior lenders== |
==Limitations to seniority== |
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===Secured parties may receive preference to unsecured senior lenders=== |
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Notwithstanding the senior status of a loan or other debt instrument, another debt instrument (whether senior or otherwise) may benefit from [[security interest|security]] that effectively renders that other instrument more likely to be repaid in an insolvency than unsecured senior debt. Lenders of a secured debt instrument (regardless of ranking) receive the benefit of the security for that instrument until they are repaid in full, without having to share the benefit of that security with any other lenders. If the value of the security is insufficient to repay the secured debt, the residual unpaid claim will rank according to its documentation (whether senior or otherwise), and will receive ''pro rata'' treatment with other unsecured debts of such rank. |
Notwithstanding the senior status of a loan or other debt instrument, another debt instrument (whether senior or otherwise) may benefit from [[security interest|security]] that effectively renders that other instrument more likely to be repaid in an insolvency than unsecured senior debt. Lenders of a secured debt instrument (regardless of ranking) receive the benefit of the security for that instrument until they are repaid in full, without having to share the benefit of that security with any other lenders. If the value of the security is insufficient to repay the secured debt, the residual unpaid claim will rank according to its documentation (whether senior or otherwise), and will receive ''pro rata'' treatment with other unsecured debts of such rank. |
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==Super-senior status== |
===Super-senior status=== |
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Unsecured lenders are theoretically (and usually) in the best position because they have first claim to unsecured assets. |
Unsecured lenders are theoretically (and usually) in the best position because they have first claim to unsecured assets. |
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Additionally, in US [[Chapter 11]] bankruptices, new lenders can come in to fund the continuing operation of companies and be granted status super-senior to other (even senior secured) lenders, so-called "[[debtor in possession]]" status. Similar regimes exist in other jurisdictions. |
Additionally, in US [[Chapter 11]] bankruptices, new lenders can come in to fund the continuing operation of companies and be granted status super-senior to other (even senior secured) lenders, so-called "[[debtor in possession]]" status. Similar regimes exist in other jurisdictions. |
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=="Senior" debt at holding company is structurally subordinated to all debt at the subsidiary== |
==="Senior" debt at holding company is structurally subordinated to all debt at the subsidiary=== |
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A senior lender to a holding company is in fact subordinated to any lenders (senior or otherwise) at a subsidiary with respect to access to the subsidary's assets in a bankruptcy. The collapse of [[Washington Mutual]] bank in 2008 highlighted this priority of claim, as lenders to Washington Mutual, Inc. received no benefit from the assets of that entity's bank subsidiaries.<ref>Shen, Linda. 9-26-2008. [http://www.bloomberg.com/apps/news?pid=20601087&sid=a2VofC5midrw&refer=home WaMu's Bank Split From Holding Company, Sparing FDIC]. ''[[Bloomberg, L.P.|Bloomberg News]]''</ref> |
A senior lender to a holding company is in fact subordinated to any lenders (senior or otherwise) at a subsidiary with respect to access to the subsidary's assets in a bankruptcy. The collapse of [[Washington Mutual]] bank in 2008 highlighted this priority of claim, as lenders to Washington Mutual, Inc. received no benefit from the assets of that entity's bank subsidiaries.<ref>Shen, Linda. 9-26-2008. [http://www.bloomberg.com/apps/news?pid=20601087&sid=a2VofC5midrw&refer=home WaMu's Bank Split From Holding Company, Sparing FDIC]. ''[[Bloomberg, L.P.|Bloomberg News]]''</ref> |
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Revision as of 23:52, 9 November 2008
In finance, senior debt, frequently issued in the form of a senior note, is debt that takes priority over other unsecured debt owed by the issuer. Senior debt has greater seniority in the issuer's capital structure than subordinated debt. In the event the issuer goes bankrupt, senior debt theoretically must be repaid before other creditors receive any payment.
Senior debt is often secured by collateral on which the lender has put in place a first lien. Usually this covers all the assets of a corporation and is often used for revolving credit lines. It is the debt that has priority for repayment in a liquidation.
It is a class of corporate debt that has priority with respect to interest and principal over other classes of debt and over all classes of equity by the same issuer.
Limitations to seniority
Secured parties may receive preference to unsecured senior lenders
Notwithstanding the senior status of a loan or other debt instrument, another debt instrument (whether senior or otherwise) may benefit from security that effectively renders that other instrument more likely to be repaid in an insolvency than unsecured senior debt. Lenders of a secured debt instrument (regardless of ranking) receive the benefit of the security for that instrument until they are repaid in full, without having to share the benefit of that security with any other lenders. If the value of the security is insufficient to repay the secured debt, the residual unpaid claim will rank according to its documentation (whether senior or otherwise), and will receive pro rata treatment with other unsecured debts of such rank.
Super-senior status
Unsecured lenders are theoretically (and usually) in the best position because they have first claim to unsecured assets.
However, in various jurisdictions and circumstances, nominally "senior" debt may not rank pari passu with all other senior obligations. For example, in the 2008 Washington Mutual Bank seizure, all assets and most (including deposits, covered bonds, and other secured debt) of Washington Mutual Bank's liabilites were assumed by JPMorgan Chase. However other debt claims, including unsecured senior debt, was not.[1] By doing this, the FDIC effectively subordinated the unsecured senior debt to depositors, thereby fully protecting depositors while also eliminating any potential deposit insurance liability to the FDIC itself. In this and similar cases, specific regulatory and oversight powers can lead to senior lenders being subordinated in potentially unexpected ways.
Additionally, in US Chapter 11 bankruptices, new lenders can come in to fund the continuing operation of companies and be granted status super-senior to other (even senior secured) lenders, so-called "debtor in possession" status. Similar regimes exist in other jurisdictions.
"Senior" debt at holding company is structurally subordinated to all debt at the subsidiary
A senior lender to a holding company is in fact subordinated to any lenders (senior or otherwise) at a subsidiary with respect to access to the subsidary's assets in a bankruptcy. The collapse of Washington Mutual bank in 2008 highlighted this priority of claim, as lenders to Washington Mutual, Inc. received no benefit from the assets of that entity's bank subsidiaries.[2]
