What is Senior Debt? Financing Characteristics + Examples

The floating, adjustable-rate nature of the debt obligations means that they provide investors with additional profits in the event that interest rates rise while the debt obligations are held. However, it also means that investors will receive a lower yield if interest rates decline over the term of their investment. A senior bank loan is a loan made by a bank or other financial institution to a company with a relatively low credit rating, but a rating that is somewhat higher than that of a company that would be considered an issuer of junk bonds.

McKinsey estimates the global capital investment surge to reach $130 trillion, much of which will be spent on infrastructure rebuilds and decarbonization projects. Liquidity has also improved in recent years as daily trading volume have improved. Among other key charactertics of SSL is that it has an active secondary market where these securities are easily traded, providing a continuous market for buyers and sellers. With increasing restrictions and guidelines from regulators, SSLs have become more generic and standard. This gives comfort to the investors looking at SSL as an attractive investment and a product to add to their portfolio.

For Business

In the next section, we’ll discuss debt covenants, which are implemented in the loan agreement by senior lenders to further protect their downside risk. While the interests of senior lenders are protected by the pledged collateral, unsecured lenders are not afforded the same type of protection (and thereby, the recoveries in the event of default are lower). The difference between senior and subordinated debt is that the former takes precedence in the event of default (or bankruptcy), as its claims are more senior. Since the financing is secured by the borrower’s assets, the collateral can be seized by the lender in the case of default (i.e. due to a missed interest payment or if the borrower cannot repay principal) or a covenant breach. Growth is vital to a company’s “long-term survival.” Capital investment helps fund growth, and business development companies such as Saratoga Investment Corp. can help fund that investment.

As such, senior debt is perceived as the cheapest source of financing because of the secured nature of the financing, i.e. senior debt carries the lowest cost of debt relative to “riskier” tranches of debt. Senior bank loans are also referred to as syndicated bank loans, as a number of them are usually packaged together, and the packaged debt obligation https://accounting-services.net/bookkeeping-illinois/ is then sold to investors. One distinct feature of senior debt is that it is raised in a private transaction between the borrower and lender(s). Given current market conditions, i.e. high risk of an economic contraction, long-lasting recession, record high inflation, etc., more strict covenants could soon return to the credit markets.

What are the Different Types of Senior Debt?

Many SMEs can benefit from using senior secured loans but might be unsure about them in practice. Though banks had money to lend, they instituted a “lockdown on lending” and focused on their larger customers. The Russia-Ukraine What Are the Risks of Senior Loans? war, unstable fuel prices, rising interest rates, and recession anxieties further stressed the lending environment. As a result, the World Bank reports, SMEs are undercapitalized by $5.2 trillion annually.