Senior Debt

Senior debt ranks ahead of subordinated financing liabilities. Because the risk for lenders is lower, the interest rates are also lower. It forms the safest and usually largest layer of the financing. Its specific priority depends on security, statutory ranking and contractual terms. An intercreditor agreement may additionally set standstill periods for junior creditors and the distribution of enforcement proceeds. Senior debt can also be unsecured.

In acquisition financings this layer typically comprises several tranches: an amortising tranche repaid over roughly five to seven years, a bullet institutional tranche with light ongoing amortisation, an acquisition facility for later add-ons, and a revolving working capital facility. In exchange for favourable terms come extensive security, information and action covenants and, in classic bank structures, financial ratios tested continuously. In institutionally driven structures some of these fall away. For the borrower this layer is the cheapest source of funding but also the one with the strongest intervention rights, which is why the covenant package is negotiated as hard as the margin. For the structure as a whole, the size of this tranche determines how much more expensive junior capital and how much equity is additionally required.

Interest on senior debt is floating, set as a reference rate plus margin, with Euribor as the reference and the margin potentially stepped by leverage ratio. Loan agreements contain financial covenants, restrictions on additional debt, distributions and asset disposals, and reporting obligations with monthly and quarterly delivery deadlines. For larger amounts the tranche is syndicated. The size of this tranche is set by the company's ability to service interest and amortisation out of free cash flow, usually with a buffer for a decline in earnings.