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Seniority

A claim's rank in the queue for repayment if the borrower fails; secured lenders are paid before senior unsecured bondholders, who are paid before subordinated holders and equity.

The waterfall runs roughly: super-senior and secured debt, senior unsecured, subordinated, hybrid and preferred, then common equity. Each layer is only paid once the layer above is made whole, which is why recovery-rate varies so sharply by rank.

Structural seniority is a separate and often overlooked wrinkle. Debt at an operating subsidiary sits closer to the assets than debt at the holding company, so holdco bonds can recover less than opco bonds with the same formal ranking.

Example: a company defaults with $600 million of enterprise value, $400 million of secured loans and $400 million of senior unsecured bonds. Loans recover 100 cents, bonds recover $200m / $400m = 50 cents, and equity is wiped out.

Related: capital-structure, subordinated-debt, recovery-rate, covenant, collateral

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

An equity curve and its drawdownAn account balance rising over a year, falling from a peak to a trough, then climbing back to the old peak.ACCOUNT EQUITY$20k$12k$8k024681012TIME (MONTHS)PEAK $16,000TROUGH $12,000DRAWDOWN−25%RECOVERY
Equity curve and drawdown. An account balance plotted month by month. The fall from the $16,000 peak to the $12,000 trough is a 25% drawdown, and the shaded area lasts until the balance climbs back to the old peak.

Educational only, not advice. Spotted an error? Post in Site Feedback.