Glossary
Senior Debt
Senior debt is borrowing that has the first claim on a borrower's cash flow and assets, ranking ahead of subordinated debt, preferred equity and common equity. It is usually secured by a first lien on collateral, carries the lowest interest rate in the capital structure and has the strongest covenants and remedies.
Formula
Example
A company with $10,000,000 of EBITDA borrows a $30,000,000 senior term loan (3.0x senior leverage) and $15,000,000 of subordinated notes, for 4.5x total leverage. If the business is later sold in distress for $35,000,000, the senior lender is repaid in full and the subordinated lenders receive the remaining $5,000,000, a recovery of about 33% on their $15,000,000.
How it is used in underwriting
Senior lenders underwrite primarily to protect principal. In corporate lending, they size loans as a multiple of EBITDA, test fixed charge coverage and evaluate collateral such as receivables, inventory, equipment and real estate. In commercial real estate, the senior mortgage lender sizes the loan on LTV, DSCR and debt yield. Because they rank first, senior lenders accept lower returns, but they also demand control: financial covenants, reporting requirements, limits on additional debt and the ability to enforce on collateral. Intercreditor agreements define how they interact with junior lenders.
Seniority has two dimensions that are often confused. Lien priority determines who is paid first from collateral proceeds, while payment priority, or subordination, determines who is paid first from the borrower's general assets and cash flow. A loan can be senior unsecured, ranking equal to trade creditors but ahead of subordinated notes. Structural subordination also matters: debt at a holding company ranks behind debt at operating subsidiaries. For lenders, understanding exactly where the loan sits, and how much value lies beneath it, is the core of estimating loss given default.
Typical benchmarks
Senior leverage limits vary by size and sector; middle market senior lenders often lend around 2.5x to 4.0x EBITDA, while commercial real estate senior loans commonly stop around 60% to 75% LTV.
Frequently asked questions
What is the difference between senior and subordinated debt?
Senior debt is repaid first from cash flow and collateral, so it carries lower risk and lower interest rates. Subordinated debt is repaid only after senior debt is satisfied, so it charges higher rates to compensate. In a default, subordinated lenders typically recover less, or nothing, if asset value is insufficient.
Is senior debt always secured?
No. Most senior debt in middle market and real estate lending is secured, but senior unsecured debt also exists, especially for large investment grade companies. Senior unsecured lenders rank ahead of subordinated creditors in payment priority but behind secured creditors with respect to the specific collateral securing those loans.
What is a first lien loan?
A first lien loan has the first priority security interest in the pledged collateral, meaning it is repaid first from the proceeds if the collateral is sold. Most senior term loans and commercial mortgages are first lien. Second lien loans share the same collateral but are paid only after the first lien is satisfied.
Related terms
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