Senior debt: Difference between revisions
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In [[finance]], '''senior debt''', frequently issued in the form of '''senior notes''' or referred to as '''senior loans''', is debt that takes priority over other unsecured or otherwise more "junior" debt owed by the issuer.{{citation needed|date=October 2014}} Senior debt has greater [[seniority (financial)|seniority]] in the issuer's [[capital structure]] than [[subordinated debt]].{{citation needed|date=October 2014}} In the event the issuer goes [[bankruptcy|bankrupt]], senior debt theoretically must be repaid before other creditors receive any payment.{{citation needed|date=October 2014}} |
In [[finance]], '''senior debt''', frequently issued in the form of '''senior notes''' or referred to as '''senior loans''', is debt that takes priority over other unsecured or otherwise more "junior" debt owed by the issuer.{{citation needed|date=October 2014}} Senior debt has greater [[seniority (financial)|seniority]] in the issuer's [[capital structure]] than [[subordinated debt]].{{citation needed|date=October 2014}} In the event the issuer goes [[bankruptcy|bankrupt]], senior debt theoretically must be repaid before other creditors receive any payment.{{citation needed|date=October 2014}} |
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Senior debt is often secured by [[Collateral (finance)|collateral]] on which the [[lender]] has put in place a [[first lien]]<ref>{{Cite web|title = The Basics of Senior Debt - Financial Web|url = http://www.finweb.com/loans/the-basics-of-senior-debt.html#axzz3kidpsCyS|website = www.finweb.com|accessdate = 2015-09-03}}</ref> |
Senior debt is often secured by [[Collateral (finance)|collateral]] on which the [[lender]] has put in place a [[first lien]].<ref>{{Cite web|title = The Basics of Senior Debt - Financial Web|url = http://www.finweb.com/loans/the-basics-of-senior-debt.html#axzz3kidpsCyS|website = www.finweb.com|accessdate = 2015-09-03}}</ref>{{citation needed|date=October 2014}} Usually this covers all the [[assets]] of a [[corporation]] and is often used for [[revolving credit]] lines.{{citation needed|date=October 2014}} It is the debt that has priority for repayment in a [[liquidation]].{{citation needed|date=October 2014}} |
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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.{{citation needed|date=October 2014}} |
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.{{citation needed|date=October 2014}} |
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Revision as of 05:51, 4 September 2015
In finance, senior debt, frequently issued in the form of senior notes or referred to as senior loans, is debt that takes priority over other unsecured or otherwise more "junior" debt owed by the issuer.[citation needed] Senior debt has greater seniority in the issuer's capital structure than subordinated debt.[citation needed] In the event the issuer goes bankrupt, senior debt theoretically must be repaid before other creditors receive any payment.[citation needed]
Senior debt is often secured by collateral on which the lender has put in place a first lien.[1][citation needed] Usually this covers all the assets of a corporation and is often used for revolving credit lines.[citation needed] It is the debt that has priority for repayment in a liquidation.[citation needed]
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.[citation needed]
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.[citation needed] 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.[citation needed] 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.[citation needed]
Super-senior status
Senior lenders are theoretically (and usually) in the best position because they have first claim to unsecured assets.[citation needed]
However, in various jurisdictions and circumstances, nominally "senior" debt may not rank pari passu with all other senior obligations.[citation needed] 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 liabilities were assumed by JPMorgan Chase.[citation needed] However other debt claims, including unsecured senior debt, were not.[2] By doing this, the Federal Deposit Insurance Corporation (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.[citation needed] 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 bankruptcies, 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.[citation needed] Similar regimes exist in other jurisdictions.[citation needed]
"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 subsidiary's assets in a bankruptcy.[citation needed] 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.[3]
References
- ^ "The Basics of Senior Debt - Financial Web". www.finweb.com. Retrieved 2015-09-03.
- ^ Federal Deposit Insurance Corporation (FDIC) Bank Acquisition Information for Washington Mutual Bank, Henderson, NV and Washington Mutual Bank, FSB, Park City, UT
- ^ Shen, Linda. 9-26-2008. WaMu's Bank Split From Holding Company, Sparing FDIC. Bloomberg News
