Junior Debt

Junior Debt

What is junior debt

Subordinate debt is debt whose repayment has less priority than other claims in the event of default. Junior debt is considered a type of subordinated debt.

BREAKDOWN of junior debt

Junior debt is a classification that investors should understand when investing in corporate credit issues. A company’s repayment priorities are part of the company’s capital structure. Companies can issue a wide variety of credit products to investors to raise capital. The structuring of these products is generally carried out by a subscriber.

Generally, the corporate debt market is much less structured than the equity market. As a result, companies have much more flexibility in obtaining capital through debt. A company can work with a bank to get a loan. They can also work with an underwriter who heads a loan syndicate with several investors investing in a loan agreement. A company can also issue bonds with variable repayment terms.

Debt repayment terms

An important repayment condition for all types of credit is their repayment tenure. Loans and bonds can be issued in the form of senior debt or subordinated debt. Senior debt is repaid first if the borrower encounters a default or a liquidation. It is generally a guaranteed secured debt, but it can also be unsecured with specific provisions for the duration of repayment. Subordinated debt follows senior debt and has its own repayment terms. Generally, senior debt requires lower interest payments and bond coupons because it presents less risk. With subordinated debt, investors are willing to assume the higher risk of lower seniority payments in the event of default by being offset by higher interest rates. Generally, subordinate debt and subordinated debt are unsecured debt that is not guaranteed by collateral.

Debt market negotiation

Different from equity, institutional debt is generally issued on the primary market, involving direct interaction between companies and investors. After issuance on the primary market, loans and bonds can then be traded on the country’s secondary markets, trading being facilitated through various negotiating groups. In the secondary market, senior debt always involves less risk than subordinated debt.

Subordinated debt issue

Subordinate debt can be synonymous with subordinated debt or refer to a second level of debt paid immediately after the repayment of senior debt. Junior debt is less likely to be repaid in the event of default, as all higher ranking debt will have priority.

In some situations, companies may issue junior debt bonds. Junior debt can also be common in unitranch bonds where investors have the opportunity to invest in different tranches of bonds as part of the bond issue. Redemption conditions are often a key factor that can influence coupon rates on a bond. The procedures for repayment of the subordinated debt in the event of default will be clearly defined by the underwriter in the terms disclosing the details of the investment of a bond investment so that investors have a clear understanding of the priority accorded to the bonds in the event default.

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