What is senior unsecured debt?

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Professionally Researched. (What's this?)

Businesses finance themselves by issuing debt. Companies and lenders agree upon terms for both parties to earn a return upon the investment, while minimizing default risks. Senior unsecured debt is a unique structure that provides some measure of security for lenders.

Identification

Senior debt is prioritized. During bankruptcy, senior creditors are paid first, from whatever assets and income remains. Unsecured debt, however, does not carry rights over any one particular asset. Unsecured debt relies upon the good faith of the company to make payments. Senior unsecured debt combines these two concepts.

Benefits

Companies can negotiate lower interest rates by applying seniority to unsecured debt. Banks are taking on less risk---knowing that their claims over assets are prioritized.

Misconceptions

Secured debt may be paid before senior unsecured debt. For example, debt may be secured by one factory. During bankruptcy, the factory is sold and all proceeds are used to pay off secured debt holders. Senior unsecured debt holders have claims over the rest of the company.

Considerations

Bondholders and creditors carry asset claims above those of common stock investors. In exchange for safety, creditors give up opportunities for growth.

Risks

Inflation increases the prices of goods over time. Inflation reduces the long-term purchasing power of interest income from senior unsecured debt.

Source:

Investopedia: Senior Debt

Investopedia: Secured Debt

Investopedia: Unsecured Debt

More Information:

U.S. Bureau of Labor Statistics: Consumer Price Index and Inflation

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