Junior debt is less secure than senior debt as it is not backed by collateral. Consumers can take on senior or junior debt, with the former being tied to tangible items like property or vehicles. In bankruptcy, senior debt holders have priority over junior debt holders.
There are different types and levels of debt that a company can issue, and therefore debt investors are treated with various levels of priority. Junior debt, also known as subordinated debt, has lower priority than senior forms of debt. This is because junior debt is generally not backed by any collateral and is unsecured relative to higher forms of debt. Junior debt is considered riskier than senior debt, which typically has some assets tied to the loans and gives investors some assurance that they will be compensated.
Consumers also take on various forms of debt, including senior debt and junior debt. A home loan or car loan are primary forms of debt because they are secured or tied to a tangible item, such as real estate or a vehicle. Junior debt would be a loan that is not tied to any physical item, and could include credit card loans. If an individual defaults on a loan agreement, the mortgage issuer and auto loan issuer can remove those items, but the credit card issuer must wait for a court to decide if and how they will be paid.
In corporate financing, the type of debt a company is obligated to carry depends on its financial structure. A company issues certain types of debt or bonds in the debt capital markets based on its financial status and loan repayment history. Once debt is issued, bondholders are entitled to subsequent payments after purchasing that debt from the company. The debt issuer, the company, is responsible for distributing principal payments to investors on a regular basis over the term of the bond. A company should prioritize payments based on the type of debt that is included on its balance sheet and will ideally meet all debt obligations.
In the event that a business is forced into bankruptcy or voluntarily chooses to file for bankruptcy, debt holders have certain rights to the assets of that business. A junior debt holder carries the least amount of claim on those assets and will be paid only if anything else remains after the senior debt holders are repaid. These senior debt holders may include creditors such as suppliers and holders of covered bonds. A secured loan is one that is backed by some collateral to which the investor is entitled if a company fails to make interest payments. Once the asset is received, the investor can either liquidate it or sell it at a profit.
Junior debt could be subordinated simply in relation to the type of debt a company has on its books. For example, a junior debt holder has lower priority than a mortgage-backed bond holder. This same junior debt holder has priority over preferred stock holders who are equally entitled to ongoing dividend payments.
Smart Asset.
Protect your devices with Threat Protection by NordVPN
