This type of debt holds a lower priority than other forms of debt in the event of a borrower’s default or bankruptcy. Should the borrower become unable to meet its financial obligations, senior debt holders receive repayment before those holding this specific debt instrument. As an illustration, a company might issue bonds with the stipulation that repayment to bondholders only occurs after all bank loans are satisfied.
The significance of this debt lies in its ability to provide companies with access to capital that might not be available through traditional lending channels. It is often utilized by firms seeking to expand or refinance existing obligations. Furthermore, it can offer investors a higher potential return compared to senior debt, compensating them for the increased risk assumed due to the lower repayment priority. Historically, this type of financing has played a crucial role in leveraged buyouts and restructurings.
