Senior debt

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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. [1] [ citation needed ] Senior debt has greater seniority in the issuer's capital structure than subordinated debt.[ citation needed ] In the event the issuer goes bankrupt, senior debt theoretically must be repaid before other creditors receive any payment.[ citation needed ]

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Senior debt is often secured by collateral on which the lender has put in place a first lien. Usually this covers all the assets of a corporation and is often used for revolving credit lines.[ citation needed ] It is the debt that has priority for repayment in a liquidation.[ citation needed ]

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.[ citation needed ]

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.[ citation needed ] 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.[ citation needed ] 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.[ citation needed ]

Super-senior status

Senior lenders are theoretically (and usually) in the best position because they have first claim to unsecured assets.[ citation needed ]

However, in various jurisdictions and circumstances, nominally "senior" debt may not rank pari passu with all other senior obligations.[ citation needed ] For example, in the 2008 Washington Mutual Bank seizure, all assets and most of Washington Mutual Bank's liabilities (including deposits, covered bonds, and other secured debt) were assumed by JPMorgan Chase.[ citation needed ] However other debt claims, including unsecured senior debt, were not. [2] 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.[ citation needed ] 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.[ citation needed ] Similar regimes exist in other jurisdictions.[ citation needed ]

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

A senior lender to a holding company 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.[ citation needed ] 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. [3]

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The Federal Deposit Insurance Corporation (FDIC) is one of two agencies that provide deposit insurance to depositors in American depository institutions, the other being the National Credit Union Administration, which regulates and insures credit unions. The FDIC is a United States government corporation providing deposit insurance to depositors in American commercial banks and savings banks. The FDIC was created by the 1933 Banking Act, enacted during the Great Depression to restore trust in the American banking system. More than one-third of banks failed in the years before the FDIC's creation, and bank runs were common. The insurance limit was initially US$2,500 per ownership category, and this was increased several times over the years. Since the passage of the Dodd–Frank Wall Street Reform and Consumer Protection Act in 2011, the FDIC insures deposits in member banks up to US$250,000 per ownership category. FDIC insurance is backed by the full faith and credit of the government of the United States of America, since its inception in 1933 no depositor has ever lost a penny of FDIC-insured funds.

Debenture Debt instrument

In corporate finance, a debenture is a medium- to long-term debt instrument used by large companies to borrow money, at a fixed rate of interest. The legal term "debenture" originally referred to a document that either creates a debt or acknowledges it, but in some countries the term is now used interchangeably with bond, loan stock or note. A debenture is thus like a certificate of loan or a loan bond evidencing the fact that the company is liable to pay a specified amount with interest. Although the money raised by the debentures becomes a part of the company's capital structure, it does not become share capital. Senior debentures get paid before subordinate debentures, and there are varying rates of risk and payoff for these categories.

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References

  1. "Senior Debt Development Finance". Pure Property Finance. Retrieved 28 July 2021.
  2. Federal Deposit Insurance Corporation (FDIC) Bank Acquisition Information for Washington Mutual Bank, Henderson, NV and Washington Mutual Bank, FSB, Park City, UT
  3. Shen, Linda. 26 September 2008. WaMu's Bank Split From Holding Company, Sparing FDIC. Bloomberg News