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In finance, senior debt, frequently issued in the form of senior notes or referred to as senior loans, is debt that takes priority over other unsecured or otherwise more "junior" debt owed by the issuer. Senior debt has greater seniority in the issuer's capital structure than subordinated debt. In the event the issuer goes bankrupt, senior debt theoretically must be repaid before other creditors receive any payment. Senior debt is often secured by collateral on which the
lender A creditor or lender is a party (e.g., person, organization, company, or government) that has a claim on the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some propert ...
has put in place a
first lien A lien ( or ) is a form of security interest granted over an item of property to secure the payment of a debt or performance of some other obligation. The owner of the property, who grants the lien, is referred to as the ''lienee'' and the pe ...
. Usually this covers all the assets of a
corporation A corporation is an organization—usually a group of people or a company—authorized by the state to act as a single entity (a legal entity recognized by private and public law "born out of statute"; a legal person in legal context) and ...
and is often used for
revolving credit Revolving credit is a type of credit that does not have a fixed number of payments, in contrast to installment credit. Credit cards are an example of revolving credit used by consumers. Corporate revolving credit facilities are typically used to ...
lines. It is the debt that has priority for repayment in a liquidation. It is a class of corporate debt that has priority with respect to interest and principal over other classes of debt and over all classes of equity by the same issuer.


Limitations to seniority


Secured parties may receive preference to unsecured senior lenders

Notwithstanding the senior status of a loan or other debt instrument, another debt instrument (whether senior or otherwise) may benefit from security that effectively renders that other instrument more likely to be repaid in an insolvency than unsecured senior debt. Lenders of a secured debt instrument (regardless of ranking) receive the benefit of the security for that instrument until they are repaid in full, without having to share the benefit of that security with any other lenders. If the value of the security is insufficient to repay the secured debt, the residual unpaid claim will rank according to its documentation (whether senior or otherwise), and will receive ''pro rata'' treatment with other unsecured debts of such rank.


Super-senior status

Senior lenders are theoretically (and usually) in the best position because they have first claim to unsecured assets. However, in various jurisdictions and circumstances, nominally "senior" debt may not rank '' pari passu'' with all other senior obligations. For example, in the 2008
Washington Mutual Bank Washington Mutual (often abbreviated to WaMu) was the United States' largest savings and loan association until its collapse in 2008. A savings bank holding company is defined in United States Code: Title 12: Banks and Banking; Section 1842: D ...
seizure, all assets and most of Washington Mutual Bank's liabilities (including deposits, covered bonds, and other secured debt) were assumed by
JPMorgan Chase JPMorgan Chase & Co. is an American multinational investment bank and financial services holding company headquartered in New York City and incorporated in Delaware. As of 2022, JPMorgan Chase is the largest bank in the United States, t ...
. However other debt claims, including unsecured senior debt, were not. By doing this, the Federal Deposit Insurance Corporation (FDIC) effectively subordinated the unsecured senior debt to depositors, thereby fully protecting depositors while also eliminating any potential deposit insurance liability to the FDIC itself. In this and similar cases, specific regulatory and oversight powers can lead to senior lenders being subordinated in potentially unexpected ways. Additionally, in US Chapter 11 bankruptcies, new lenders can come in to fund the continuing operation of companies and be granted status super-senior to other (even senior secured) lenders, so-called " debtor in possession" status. Similar regimes exist in other jurisdictions.


"Senior" debt at holding company is structurally subordinated to all debt at the subsidiary

A senior lender to a
holding company A holding company is a company whose primary business is holding a controlling interest in the securities of other companies. A holding company usually does not produce goods or services itself. Its purpose is to own shares of other companies ...
is in fact subordinated to any lenders (senior or otherwise) at a subsidiary with respect to access to the subsidiary's assets in a bankruptcy. The collapse of Washington Mutual bank in 2008 highlighted this priority of claim, as lenders to Washington Mutual, Inc. received no benefit from the assets of that entity's bank subsidiaries.Shen, Linda. 9-26-2008
WaMu's Bank Split From Holding Company, Sparing FDIC
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References


External links


Senior debt
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