Seniority

Where a particular claim sits in the queue for payment if the borrower fails. Secured claims are paid from their collateral first, then senior unsecured claims, then subordinated ones, with shareholders last.

Example

On assets of 340m against 10m of preferential claims, a 180m secured lender and 190m of unsecured claims, the secured lender was paid in full while the unsecured creditors recovered 78.95 cents in the dollar.

Important

A higher coupon from the same issuer is nearly always payment for a worse position in this queue, not a better opportunity. Establish the seniority of the specific issue before deciding the yield is generous.

Related terms

• Creditor — Someone who has lent money and is owed repayment, ranked ahead of equity holders if the borrower runs into trouble.
• Recovery rate — The proportion of a claim a creditor actually receives after a default, once the borrower's assets have been realised and distributed in rank order.
• Issuer — The borrower on the other side of a bond - a sovereign government, a state or municipality, a government agency or a company. The issuer owes the coupons and the par value.
• Residual claim — A right to what is left over after all other claimants have been satisfied. Ordinary shareholders hold a residual claim, which is why they are paid last in a wind-up and why nothing is guaranteed to them.

Lessons that explain it

• With several preferred classes, each one decides whether to convert — When a company has several classes of preferred shares, exit proceeds are divided in order of seniority, and each class chooses between its preference and converting. Working through exits of different sizes shows how common shareholders are affected. (12 min)
• A bond is a loan with a contract: what you are owed, and by whom — Four facts define a bond - issuer, par, coupon, maturity - and all four are contractual. You are a creditor, ranking ahead of every shareholder. (10 min)
• Two shareholders can own the same percentage and receive very different amounts — Common and preferred shares can represent the same ownership percentage, but preferred shares usually come with rights - especially liquidation preferences - that decide who gets paid first when a company is sold. (10 min)
• Every instrument answers one question differently: what happens if it goes badly — Warrants give the right to buy shares at a set price. Venture debt is a loan that ranks ahead of equity and often comes with warrants. In a poor outcome, the order of claims decides who recovers anything. (11 min)
• You are the lender, so you inherit the lender's worst day — Private credit means lending money outside public bond markets - to companies, property projects or individuals - usually directly or through a platform or fund, with no easy way to sell the loan. (9 min)
• Appraising one loan: what backs it, how thin the cushion is, and who collects — Evaluating a loan means asking how the borrower repays, what happens if they cannot, how far collateral could fall before you lose money, and how reliable the lender or platform is at recovery. (13 min)

All 578 terms in the Investing glossary