What is Senior Debt?
Senior debt is the first level of a corporation’s liabilities which means it is paid out first, ahead of all other creditors. Senior debt, as opposed to junior debt, is first in seniority and is often secured by collateral in the form of a lien.
Senior debt is among the safest form of financing for the party providing the funds. Due to its inherent low risk, it also provides the least amount of return. However, in exchange for this low return, significant protection is provided even in the event of bankruptcy. Should a corporation go bankrupt, any remaining funds, dissolved assets or other available sources of value must first repay senior debt before other creditors are able to collect.
Senior debt is financing that has been lent to a corporation for a pre-negotiated period of time with interest paid on the principal. The lender profits from this arrangement due to the scheduled period of borrowing on which the interest applies. The risk is low, since the borrower is contractually obligated to make payments on a pre-determined schedule. The lender does not gain the benefit of a higher potential return since the financing and its recoupment is not based on the borrowers financial performance. For this reason, senior debt is prioritized over other investments and creditors.