Unsubordinated debt, also known as senior security or senior debt, refers to a type of obligation that stands at the top of the hierarchy when it comes to repayment. Holders of unsubordinated debt have the first claim over a company’s assets or earnings in the event of bankruptcy or insolvency, resulting in a lower risk compared to other forms of debt.
Key Takeaways
- Unsubordinated debt must be repaid before any other form of debt if the debtor goes bankrupt or insolvent.
- Most unsubordinated debt is secured by collateral, adding an extra layer of safety for lenders.
- This type of debt is also referred to as a senior security or senior debt.
- Examples of unsubordinated debt include exchange-traded notes, collateralized securities, and certificates of deposit.
How Unsubordinated Debt Works
When a company faces bankruptcy or insolvency, there’s a specific order in which creditors are repaid. Lenders of unsubordinated debt receive full payment first, as this debt is often secured by collateral. Examples of unsubordinated debt include mortgage bonds and certain high-grade debt securities, which stand out due to their secure claims.
As these debts carry lower risk due to their high-priority status, they typically offer lower interest rates. This translates to lenders accepting reduced borrowing costs in exchange for the assurance of being repaid first during liquidation. Once unsubordinated debt lenders are satisfied, any remaining funds are allocated to preferred stockholders, subordinated debt holders, and finally, common shareholders.
Types of Unsubordinated Debt
Examples of unsubordinated debt encompass various financial instruments such as:
- Exchange-Traded Notes (ETNs): Debt instruments traded on exchanges, providing investors with greater liquidity.
- Collateralized Securities: Includes Mortgage-Backed Securities (MBS) structured with tranches varying in risk, interest rates, and maturities.
- Certificates of Deposit (CDs): Offers fixed returns over specified periods, usually covered by insurance up to certain limits.
Collateralized securities split typically into senior tranches with higher claims and credit ratings and junior tranches with lower priority.
Unsubordinated vs. Subordinated Debt
Unsubordinated debt vastly differs from subordinated debt. While unsubordinated debt has the top claim over assets, subordinated (or junior) debt ranks lower. In the event of a company’s asset liquidation, subordinated debt holders only get paid after all senior debts and preferred stockholders are satisfied. Often, if there isn’t enough cash left, subordinated debt holders may receive nothing.
Given the higher risk, subordinated debt typically offers higher interest rates as compensation. Unsubordinated debt, though prioritized, presents lower returns due to its decreased risk and guaranteed repayment assurance.
Explore the security and assurance that comes with understanding unsubordinated debt—a cornerstone for safeguarding investments and ensuring financial structures align with your investment strategies.
Related Terms: subordinated debt, collateral, tranches, senior debt.
