When a company is insolvent and negotiating reorganization under bankruptcy law does not pan out, the firm’s assets are sold off to pay stakeholders’ claims. Some items are always paid first, such as payroll taxes. The remaining money is used to pay creditors and shareholders based on priority. Senior unsecured debt is one category within the priority sequence to determine the order in which claims are paid.
Prioritizing Creditor Claims
Senior claims take priority over others when a business is liquidated. A claim with low priority is referred to as subordinate or junior. All creditor claims, or the debt the firm owes, are senior to shareholder claims. Secured debt is guaranteed by specific assets and is the most senior. Typically, secured debt includes obligations such as bank loans. Senior unsecured debt comes next. A company may have several unsecured debt obligations, and each takes its place on the priority list. The terms and conditions of each unsecured debt help determine if it is senior to other unsecured debt. The age can also make a difference. For example, a corporate bond issue predating similar bond issues will be the senior unsecured debt. The seniority of a debt is important to investors because a senior debt must be paid off in its entirety before subordinate claims are paid. Consequently, the more senior a debt is, the less risk it carries for investors.