Senior debt

Senior debt is debt that sits at the front of the line for repayment if a company fails. In a bankruptcy or liquidation, senior debt holders are paid before holders of subordinated debt, also called junior debt, and all debt holders are paid before preferred and common shareholders. Seniority is about this ranking, not about how long the debt runs, so a short term bank loan and a thirty year bond can both be senior.

Senior debt comes in two main forms. Senior secured debt is backed by specific collateral, such as property, inventory or receivables, which lenders can claim if the company defaults. Senior unsecured debt, which includes most senior notes sold to bond investors, has no specific collateral but still ranks ahead of subordinated debt. Secured lenders usually recover the most in a restructuring, unsecured senior holders less, and subordinated holders less again, which is why each layer pays a progressively higher interest rate.

For a bond investor, seniority decides how much is likely to be recovered if things go wrong, so the same company's senior and subordinated bonds can carry very different risk. For a stockholder, the amount of senior debt shows how much has to be paid back before equity gets anything. A company with a large stack of secured debt ahead of everyone else leaves less for shareholders in a downturn, so check the debt notes in the annual report for how much of the total ranks first.