Senior debt

It is, therefore, the debt that will pay a lower interest rate compared to the rest of the types of debt issued by the same issuer, and therefore, of lower risk.

Companies have two forms of financing in the capital markets , on the one hand the issuance of debt (bonds) or shares . The use of one or the other method will depend on the relative cost, therefore, in a risk appetite scenario it will be more convenient to issue shares, while periods in which the climate is more pessimistic it will be more attractive to issue debt.

Types of senior debt

Senior debt can be secured or unsecured. The debt that is backed by a financial asset ( collateral ) is that which is secured, with the investor having preference over the unsecured debt of the rest of the creditors. While the debt that responds to the assets and cash flows of the issuer corresponds to unsecured debt.

Senior debt (especially insured) may have a better credit quality than that of the issuer, depending on the quality of the collateral provided.

Senior secured debt is divided into three categories:

• Senior secured debt: in which case a single asset is the collateral.
• Senior secured debt: in which case a portfolio of assets responds as collateral.
• Junior secured debt.

Unsecured senior debt is also divided into three categories:

• Unsecured senior debt.
• Unsecured junior debt.
• Subordinated debt.

An example of senior secured debt are collateralized bonds, such as Covered Bonds (in Spain they are called Cédulas Hipotecarias) or Securities, placing them at the top of the list in order of priority (they charge the first or assume losses the last).

• A Covered Bond (usually triple A) is a type of bond issued only by a financial institution (bank), whose bond carries high-quality collateral provided as additional collateral, usually a mortgage loan. It is considered one of the bonds with the highest credit quality, similar to a government bond .
• A Title Bond is a type of bond similar to a CB. They also carry collateral as collateral, but in this case the bond issue process is carried out off the bank’s balance sheet, creating a special company to carry out the issue. The titling process can be consulted here .

An example of unsecured senior debt is a conventional bond . For its part, commercial paper is also considered unsecured debt, but in the short term.

The credit risk assumed in the bonds with better quality will have higher recovery rates in the event of bankruptcy or default . And on the contrary, when they have a worse order of priority in the ranking, the greater the credit risk and therefore will have lower recovery ratios.

By moving so far away from stocks (placed last in the order of priority -the first to assume losses), it has a very low correlation with them, because as we descend, losses will be assumed earlier in the case of bankruptcy or default. . Therefore we have:

• Senior secured debt (first to collect, last to assume losses).
• Unsecured senior debt.
• Subordinated debt.
• Hybrid debt.
• Shares (last to collect, first to take losses).