Debt financing is a crucial aspect of corporate finance that enables companies to raise capital for growth, expansion and operational purposes. As the capital markets continue to evolve, the plethora of debt instruments available to companies becomes increasingly diverse. Among these instruments, senior secured debt and senior unsecured debt are two prominent forms that possess their distinct features and characteristics. A deep comprehension of the differences between these debt instruments is essential for both investors and companies, as it can significantly impact the level of risk involved and the likelihood of repayments.
Senior secured debt is a type of debt that is backed by a set of specific assets or collateral. In the event of a default, the lender has the right to seize the collateral and use it to repay the debt. This form of debt is considered less risky for investors as it provides a measure of security in the event of default. Consequently, senior secured debt typically offers a lower cost of capital in terms of interest rates, compared to unsecured debt.
In contrast, senior unsecured debt does not have any specific assets backing it. In case of default, the lender must rely on the company's assets or the proceeds from a liquidation to repay the debt. As a result, senior unsecured debt is considered higher risk and typically carries a higher cost of capital, in terms of interest rates, compared to senior secured debt.
It is important to appreciate the concept of seniority, which further differentiates these two types of debt. Senior debt refers to debt that is given priority in terms of repayments in case of default, while junior debt is lower in priority. Both senior secured and senior unsecured debt are considered senior debt, as they are higher in priority compared to junior debt. However, senior secured debt is considered more senior compared to senior unsecured debt, as it has the added advantage of collateral.
In terms of capital structure, senior secured debt can be a valuable option for companies seeking to raise capital, as it allows for lower cost of capital compared to unsecured debt. On the other hand, senior unsecured debt can be a viable alternative for companies that have limited assets to use as collateral, as it provides access to funding without the need for assets as collateral.
In conclusion, senior secured and senior unsecured debt are two critical debt instruments that offer unique advantages and disadvantages. It is imperative to have a thorough understanding of the differences between these two forms of debt to make informed decisions in the capital markets. Companies must evaluate their specific circumstances and funding needs, to determine whether senior secured or senior unsecured debt is the most suitable form of debt financing.
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About the author
Sabbir Rahman is Managing Director of Langdon Capital and a Partner at Bridging Funding. He has held prior roles with Morgan Stanley, Lazard and Barclays Investment Bank. He has executed over £60 billion in notional value of transactions across financing, M&A and derivatives with global corporates, private equity funds and financial sponsor groups.
About Langdon Capital
Langdon Capital provides in-house transaction services to C-suites and Boards of publicly-listed and PE-backed businesses during the negotiation, execution and due diligence of corporate finance and capital markets transactions and senior interim resourcing solutions across finance, treasury, strategy and corporate development | contact info@langdoncap.com | visit www.langdoncap.com
About Bridging Funding
Bridging Funding is a private credit fund engaged in principal lending of commercial property bridging loans in the UK and select South-East Asian markets. We lend between £200k and £20m per transaction. As a private credit fund, our credit sanctioning process is leaner and more flexible than lenders funded by bank capital | contact sr@bridgingfunding.com | mention code “Langdon” for preferential rates | visit www.bridgingfunding.com
This is not financial advice or any offer, invitation or inducement to sell or provide financial products or services or to engage in any form of investment activity.
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