What is Senior Debt?
Short answer: Senior debt is borrowing intended to rank ahead of identified junior debt or equity for payment and recovery. Seniority may arise through contractual payment ranking, security over assets, priority of liens, guarantees, or the borrower's position in the corporate group. The word senior alone does not prove that a lender has first claim on every asset or will be repaid in full.
Secured and senior are related but distinct. A senior unsecured lender can rank equally with other unsecured creditors while a secured lender has priority in specified collateral. First-lien and second-lien lenders may both be senior to subordinated debt but have different collateral priority. Structural seniority arises when debt at an operating subsidiary is serviced before value can be distributed to a holding-company lender. Facilities can also include revolving and term tranches with shared collateral but different maturities or repayment rules. Intercreditor agreements allocate enforcement control and proceeds between creditor groups.
How it works
Review the facility, security documents, guarantee schedule and intercreditor agreement together. Map each borrower, guarantor, collateral asset, lien rank and excluded subsidiary. Record cash interest, benchmark floors, fees, amortisation, maturity, mandatory prepayment, covenants and events of default. Forecast debt service and covenant compliance for each test date. For recovery analysis, estimate net collateral or enterprise proceeds by legal entity, deduct enforcement and priority claims, apply proceeds to secured tranches in agreed order, then allocate any residual to unsecured and subordinated claims.
Illustrative senior-debt recovery = proceeds available to the senior class / senior claim, capped at 100%
Example
A group has a 1,000 revolving facility and a 4,000 first-lien term loan, both secured and ranking equally, plus 2,000 of subordinated debt. At default, 600 is drawn on the revolver and the term loan balance is 3,800, so first-lien claims total 4,400. Net collateral proceeds are 3,520. If the documents allocate shared collateral proportionately, first-lien recovery is 3,520 divided by 4,400, or 80%. The revolver receives 480 and the term loan receives 3,040. Nothing from that collateral reaches subordinated debt. The senior label therefore did not prevent a 20% shortfall.
Why it matters
Companies use senior debt when cash flow or assets can support priority borrowing. It is often less dilutive than equity but restricts cash through interest, amortisation, covenants and security. Boards should test whether the maturity matches the funded asset or transaction and whether collateral grants prevent later financing. Lenders evaluate repayment sources, downside coverage, documentation and control rights. In an acquisition, senior debt sizing affects the equity cheque, returns and refinancing risk. A cheaper coupon can be offset by heavy amortisation, restricted baskets or limited operating flexibility.
Actual priority depends on enforceable documents and local insolvency, security and avoidance law. A guarantee may be limited, a lien may be unperfected, and some employee, tax or insolvency claims may rank ahead by statute. Cash in non-guarantor entities may be unavailable. Accounting classification does not establish legal seniority. Recovery assumptions should include enforcement time, costs and collateral volatility. Borrowers need legal review of covenants, negative pledges, guarantees and remedies, plus tax and accounting review of fees and interest. Never infer risk or recovery solely from the words senior or secured.