What is senior debt? Definition
Senior debt is debt that benefits from the highest repayment priority in the creditor hierarchy. Contracted with one or several banks, or with private debt funds, it is generally secured by specific collateral. It is the "backbone" of debt financing for a company or an acquisition transaction.
A priority, secured form of debt
Senior debt is characterised by two features: its payment priority and its security package. It is backed by real security interests (pledges, mortgages, security over the company's assets), making it the best-protected form of debt. In exchange for this lower risk, it offers the lowest cost of financing within the capital structure, a rate lower than that of mezzanine debt or unitranche financing.
Why "senior": priority within the repayment waterfall
The term "senior" refers to its rank: in the event of financial difficulty, senior debt holders are repaid first, ahead of subordinated debt (junior or mezzanine) and then shareholders. This position at the top of the repayment waterfall shapes its entire risk profile: low risk, historically high recovery rates, and moderate remuneration.
Key takeaways
- Senior debt = the tranche with repayment priority, the most heavily secured.
- Lowest risk within the debt structure → most moderate yield.
- Backbone of LBO financing: often 50% to 60% of the total.
How does senior debt work?
Security package and covenants
Senior debt is framed by two protective mechanisms. On the one hand, real security interests, which secure repayment against the company's assets. On the other, covenants: contractual financial clauses (leverage ratios, interest coverage ratios…) that the borrower must comply with throughout the life of the loan. In the event of non-compliance ("covenant breach"), the lender may renegotiate, or even demand early repayment, a mechanism whose primary role is to provide an early warning of deteriorating risk.
Term Loan A, Term Loan B and revolving facility
Senior debt comes in several formats. The Term Loan A (TLA) amortises according to a contractual schedule, is subscribed mainly by commercial banks, and has a shorter tenor (often 5 to 7 years). The Term Loan B (TLB) is repaid at maturity (bullet repayment), placed with institutional investors through the syndicated loan market, with a margin slightly higher than the TLA. A revolving credit facility (RCF) is frequently added, covering short-term working capital needs without financing the acquisition itself.
The yield on senior debt
Because it is the best protected, senior debt offers the most moderate yield within the debt structure, indicatively in the order of Euribor plus 250 to 450 basis points depending on the transaction, or roughly 5% to 7% overall (order of magnitude, sources to be confirmed). Its historical recovery rate in the event of default is high, generally higher than that of subordinated tranches.
Senior, mezzanine and unitranche debt: what are the differences?
Senior debt is best understood in relation to the other layers of the financing structure: subordinated for mezzanine debt, hybrid within a single tranche for unitranche financing.
| Criterion | Senior debt | Mezzanine debt | Unitranche debt |
|---|---|---|---|
| Rank | Priority | Subordinated | Mixed (senior + mezz.) |
| Security | Real security interests | Often unsecured | Variable |
| Indicative rate | 5 – 7% | 8 – 15% | ≈ 6 – 13% |
| Repayment | Amortising (TLA) / bullet (TLB) | Bullet | Bullet |
| Risk | Low | High | Moderate |
Senior debt in an LBO structure
The backbone of the financing
In a Leveraged Buy-Out (LBO) transaction, senior debt constitutes the principal source of external financing: it typically represents 50% to 60% of the structure, corresponding to leverage of around 3 to 4 times the target's EBITDA. Subordinated debt (mezzanine or junior) covers an additional ten percentage points or so, with the balance contributed as equity by the private equity sponsor.
Repaid from the target's cash flows
The holding company created for the acquisition services the debt (payment of interest and repayment of principal) using the cash flows upstreamed by the target company (dividends, management fees). This is the entire principle of leverage: the debt is repaid using the resources of the acquired business itself. On larger transactions, senior debt is provided by several banks that syndicate a portion of it (bank syndication, club deals).
Benefits and points of attention of senior debt
For the investor
For an investor in private debt funds, senior debt is the defensive segment of an allocation: repayment priority, security, low volatility and low correlation with listed markets, for a yield above that of government bonds. It provides the stable core around which to calibrate higher-yielding strategies (mezzanine, unitranche).
Risk, recovery and covenant-lite structures
Senior debt is not without risk: repayment is never guaranteed, and recovery depends on the quality of the security package and the value of the underlying assets. One point of attention has intensified in recent years: the spread of covenant-lite loans, which reduces the early-warning function historically enjoyed by the senior lender and requires active operational monitoring. Like any form of private debt, it also remains relatively illiquid.
How to invest in senior debt?
Through a private debt fund (senior direct lending)
Investors gain exposure to senior debt through private debt funds, notably direct lending vehicles, which originate and monitor senior loans to unlisted companies. The quality of the manager (credit analysis, structuring of security and covenants, monitoring of financed companies) is decisive. This asset class is reserved for professional or qualified investors, accessed through their advisors.
Private Corner's approach
Private Corner, a French digital asset management company regulated by the AMF (no. GP-20000038), gives wealth management professionals and their clients access to a selection of funds, including a private debt fund (with strategies weighted towards senior debt) through a fully digital platform. Its Private Corner Credit Yield fund is exposed to strategies managed by CVC Capital Partners and General Atlantic and generates regular coupon payments. Access starts at €100,000 (€20,000 via its FCPR), for professional or qualified investors.
Conclusion
Senior debt is the foundation of the financing structure: priority-ranked, secured and low risk, it offers a moderate yield alongside strong capital protection. At the heart of LBO structures, where it finances the majority of the acquisition, it represents, for the private debt investor, the defensive building block of an allocation, to be balanced with higher-yielding strategies. Its relative safety does not do away with the need for heightened attention to security and covenants, hence the importance of a rigorous manager, accessible through an AMF-regulated asset management company.
FAQ
What is senior debt?
Senior debt is the tranche of debt with repayment priority, secured by collateral (real security interests). It is the least risky form of debt for the lender, and therefore the least remunerative.
What is the difference between senior debt and mezzanine debt?
Senior debt ranks first for repayment and is secured; mezzanine debt is subordinated to it (repaid afterwards), most often unsecured, therefore riskier and better remunerated, with the additional potential for equity participation.
What is the yield on senior debt?
The most moderate yield within the debt structure, indicatively in the order of Euribor plus 250 to 450 basis points, or roughly 5% to 7% depending on the transaction, though still above government bonds.
What role does senior debt play in an LBO?
It represents the bulk of debt financing, often 50% to 60% of the structure (leverage of around 3 to 4 times EBITDA), repaid as a priority from the cash flows generated by the acquired company.
How can one invest in senior debt?
Through a private debt fund (often direct lending), accessible to professional or qualified investors. Private Corner provides access to institutional private debt funds from €100,000 (€20,000 via its FCPR), through wealth management advisors.
