Senior Debt vs. Subordinated Debt
Senior debt refers to debt that is in first-lien position. In the event of a default and subsequent liquidation, the senior lender (often a commercial bank), has first priority in recouping its investment. When a company goes bankrupt, stake holders divide the proceeds from selling the company’s assets. The senior lender is first to be re-paid, followed by the subordinated debt holders, followed by equity holders. Because senior debt’s first priority repayment presents a lower-risk position compared to subordinated debt or equity investors, the senior debt is expected to have more favorable interest rates associated with it, commensurate with the lower risk assumed.