Types of Senior Debt, Secured Notes and Private Debt

A company raising USD 25 million of debt can receive proposals that look completely different even when every lender describes its facility as senior financing.

One bank might offer a first-lien term loan secured by substantially all corporate assets. A private credit fund might provide a unitranche facility. Another lender can structure an asset-based revolver against accounts receivable and inventory. A stronger borrower may be able to issue senior unsecured notes without pledging operating assets.

These instruments differ in collateral, repayment, covenants, pricing, amortization, lender protections and flexibility.

The correct structure depends on what the borrower is financing and which assets and cash flows can support the debt.

What Is Senior Debt?

Senior debt sits ahead of subordinated debt and equity in the borrower's capital structure.

If a borrower defaults or enters an insolvency process, senior creditors generally have priority over junior creditors according to the financing documents, applicable law and any intercreditor arrangements.

Senior debt can be secured or unsecured.

A senior secured lender benefits from both contractual payment priority and security over defined assets.

A senior unsecured lender can still rank ahead of subordinated obligations contractually while having no specific security interest in operating assets.

Actual priority can be more complicated where different creditors have claims against different subsidiaries or collateral pools. The legal structure matters as much as the headline label.

Senior Secured Term Loans

A senior secured term loan is one of the most common structures for substantial corporate borrowing.

Collateral can include:

• accounts receivable;
• inventory;
• machinery and equipment;
• real estate;
• bank accounts;
• intellectual property;
• shares of subsidiaries;
• material contracts; and
• other assets included in the security package.

The borrower receives committed capital and repays the loan according to an agreed maturity and amortization schedule.

Senior secured term loans can finance acquisitions, refinancings, recapitalizations, expansion programs and other defined corporate uses.

First-Lien Debt

First-lien debt has the first-ranking security claim over the collateral covered by its lien, subject to permitted liens and the detailed financing documents.

This priority is valuable because the lender expects to recover from collateral before creditors holding junior liens against the same assets.

First-lien lenders therefore generally accept lower returns than lenders taking subordinated positions, all else being equal.

Financely's structured debt placement for U.S. companies covers senior financing mandates where debt needs to be built around a borrower's cash flow, collateral and transaction objective.

Second-Lien Debt

Second-lien debt is also secured but ranks behind the first-lien lender with respect to the shared collateral.

The second-lien lender takes greater recovery risk and normally expects a higher return.

Second-lien financing can be useful where the borrower already has senior debt in place but needs additional leverage that the first-lien lender is unwilling to provide.

The relationship between the creditors is normally governed by an intercreditor agreement covering lien priority, payments, enforcement, standstill periods and treatment of collateral proceeds.

Senior Unsecured Notes

A senior unsecured note does not benefit from a specific lien over the borrower's operating assets.

The investor instead relies primarily on the issuer's general creditworthiness and contractual promise to repay.

Unsecured financing is therefore more readily available to borrowers with sufficient scale, recurring cash flow, balance-sheet strength and market credibility.

Advantages for the issuer can include:

• assets remain unencumbered;
• greater flexibility for future secured facilities;
• potentially fewer collateral reporting requirements;
• simpler collateral administration; and
• access to a broader capital structure where the issuer is sufficiently creditworthy.

The absence of collateral does not mean the note lacks covenants. Unsecured creditors can still negotiate leverage tests, restricted-payment provisions, limitations on additional debt and other contractual protections.

Secured Notes

A secured note combines note-style debt documentation with a collateral package.

Security can cover substantially all assets or a narrower collateral pool.

Secured notes are particularly relevant when investors want protection beyond the issuer's general credit but the financing is being structured outside a conventional bilateral bank loan.

As with a secured term loan, the economic value of the security depends on collateral quality, lien perfection, prior claims and expected recoveries rather than the fact that the word "secured" appears in the instrument name.

Revolving Credit Facilities

A revolving credit facility allows the borrower to draw, repay and redraw capital during the availability period, subject to the facility terms.

Revolvers are useful for fluctuating working-capital needs rather than one fixed expenditure.

Companies can use revolving debt for:

• seasonal inventory;
• receivables growth;
• supplier payments;
• short-term operating needs;
• acquisition working capital; and
• general liquidity.

A revolver can sit alongside a term loan in the same senior financing package.

Asset-Based Lending

Asset-based lending sizes availability primarily against eligible collateral rather than relying only on an EBITDA multiple.

A borrowing base can include:

• eligible accounts receivable;
• eligible inventory;
• equipment;
• real estate; or
• other assets accepted by the lender.

Availability changes as the collateral base changes.

This can be attractive for distributors, manufacturers and other asset-rich companies whose operating assets support more debt than a conventional cash-flow lender would provide.

ABL facilities also involve substantially more collateral reporting and monitoring than a conventional unsecured corporate loan.

What Is Private Debt?

Private debt refers broadly to debt negotiated privately between borrowers and non-public-market capital providers.

Private credit funds have become important providers of senior secured, unitranche, second-lien, mezzanine and specialty financing.

Private debt is particularly relevant where a borrower needs speed, complexity tolerance, leverage or structural flexibility beyond what its conventional bank group will provide.

Private credit is not automatically easier money.

The lender still underwrites cash flow, leverage, collateral, management, transaction risk and repayment. The difference is often greater flexibility in how the risk can be structured and priced.

Financely's private credit placement work focuses on matching borrowers with funds whose underwriting mandate fits the size, sector, leverage and purpose of the transaction.

Bank Debt vs. Private Credit

Banks and private credit funds can both provide senior debt, but their business models and credit parameters differ.

The cheaper proposal is not always the better financing. Borrowers should compare total economics, certainty, covenant restrictions, amortization, prepayment terms and execution requirements.

Unitranche Financing

Unitranche financing combines what would otherwise be separate senior and junior debt layers into one borrower-facing facility.

The borrower generally deals with a single blended debt instrument rather than negotiating a conventional first-lien loan and a separate mezzanine facility.

Behind the borrower-facing facility, multiple lenders can allocate economics and priority among themselves through first-out and last-out arrangements.

Unitranche can be attractive for:

• leveraged acquisitions;
• sponsor-backed companies;
• refinancings;
• recapitalizations; and
• transactions where execution certainty matters more than achieving the lowest possible senior-bank spread.

Unitranche is usually more expensive than conventional senior bank debt because the blended return compensates for leverage and risk that would otherwise sit in separate debt tranches.

Delayed-Draw Term Loans

A delayed-draw term loan commits capital that can be drawn later when specified conditions are satisfied.

This is useful where the borrower knows it will require additional capital but does not need the entire loan on closing day.

Examples include:

• acquisition pipelines;
• roll-up strategies;
• capital expenditure programs;
• construction schedules;
• equipment purchases; and
• staged expansion plans.

The borrower gains committed future capacity while avoiding the need to fund and pay full interest on unused capital from the initial closing date.

Mezzanine and Subordinated Debt

Mezzanine financing sits behind senior debt and ahead of equity.

It is used when senior debt capacity is insufficient to fund the complete transaction but the sponsor wants to limit the amount of additional equity required.

Mezzanine lenders take greater risk and therefore expect higher returns.

Those returns can combine:

• cash interest;
• PIK interest;
• original issue discount;
• exit fees;
• warrants; or
• other negotiated economics.

The senior lender normally controls when the junior creditor can receive payments or exercise remedies following a default.

Intercreditor Agreements Determine Who Controls the Downside

When several debt layers exist, lien priority alone does not answer every question.

Creditors also need rules governing:

• payment priority;
• collateral enforcement;
• default notices;
• standstill periods;
• remedies;
• amendments;
• purchase options;
• turnover of improperly received payments; and
• distribution of enforcement proceeds.

Financely covers these relationships in its intercreditor agreement guide for senior debt, mezzanine and unitranche.

Example Private Debt Transaction

Consider a U.S. industrial company acquiring a competitor.

A bank might be willing to lend only USD 20 million because of leverage limits or acquisition risk.

A private credit fund can potentially provide the full USD 28 million senior facility at a higher return if the combined company's cash flow supports the leverage.

The fund takes security over the operating companies, establishes leverage and fixed-charge covenants, controls additional indebtedness and requires mandatory prepayments from specified proceeds.

The borrower pays more than it might under conventional bank financing but avoids an additional USD 8 million equity contribution and closes with one debt provider.

Senior Debt for Acquisitions

Acquisition financing is one of the largest uses of private senior debt.

Lenders examine:

• purchase price;
• historical EBITDA;
• quality of earnings;
• buyer contribution;
• pro forma leverage;
• customer concentration;
• synergies;
• working-capital requirements;
• management continuity;
• integration risk;
• collateral;
• seller financing; and
• post-close liquidity.

The lender is underwriting the combined company that will exist after closing rather than simply lending against the target's historical purchase price.

Senior Debt for Refinancing

Companies refinance debt for reasons beyond reducing the interest rate.

A refinancing can:

• extend maturity;
• replace restrictive lenders;
• increase liquidity;
• consolidate several debt facilities;
• remove near-term amortization;
• release collateral;
• fund additional growth; or
• reset covenants following a change in the business.

Private credit becomes especially relevant where a conventional refinancing is difficult because the company has temporary earnings volatility, an upcoming maturity or a transaction that falls outside standard bank policy.

How Lenders Calculate Debt Capacity

Borrowers often begin with the amount they want to raise.

Lenders begin with the amount the business can repay.

Debt capacity can depend on:

• EBITDA;
• free cash flow;
• existing leverage;
• fixed charges;
• capital expenditure;
• working-capital requirements;
• collateral value;
• customer concentration;
• revenue durability;
• cyclicality;
• transaction purpose; and
• downside performance.

A company producing USD 10 million of EBITDA does not automatically qualify for a fixed multiple of debt.

Two companies with identical EBITDA can support substantially different leverage if one has recurring contracted revenue and limited capital expenditure while the other operates in a volatile market with heavy working-capital requirements.

Covenants Matter as Much as Pricing

A borrower comparing debt proposals should not rank them by spread alone.

Material terms can include:

• maximum leverage;
• minimum fixed-charge coverage;
• minimum liquidity;
• permitted acquisitions;
• permitted additional debt;
• capital-expenditure limits;
• restricted payments;
• dividend restrictions;
• cash sweeps;
• mandatory prepayments;
• reporting requirements;
• amortization;
• call protection;
• prepayment premiums; and
• events of default.

A slightly more expensive facility can be economically superior if it provides the company with enough covenant flexibility to execute its operating plan.

Cash Interest vs. PIK Interest

Most senior debt requires current cash interest.

Junior and more flexible private debt can sometimes include payment-in-kind interest.

PIK interest accrues to the loan balance rather than being paid entirely in cash during the period.

This preserves near-term liquidity but increases the amount the borrower ultimately owes.

PIK therefore solves a timing problem rather than making the financing cheaper.

What Private Debt Lenders Underwrite

Private lenders can offer structural flexibility, but they still need a defensible credit case.

Underwriting commonly covers:

• historical financial performance;
• quality of earnings;
• revenue concentration;
• customer retention;
• gross margins;
• EBITDA adjustments;
• cash conversion;
• working-capital requirements;
• existing debt;
• collateral;
• management;
• industry cyclicality;
• transaction purpose;
• downside cases; and
• exit or refinancing path at maturity.

The amount a company wants to borrow is not the same as the amount its cash flow and collateral can support.

Strong Senior Debt Candidates

Stronger transactions generally involve:

• established operating companies;
• meaningful recurring revenue;
• positive EBITDA or a clear asset-backed repayment case;
• credible financial reporting;
• manageable leverage;
• defined use of proceeds;
• identifiable repayment capacity;
• experienced management;
• adequate borrower or sponsor contribution where required; and
• sufficient information for lender due diligence.

Weak Debt Raises

Transactions become difficult when:

• the borrower provides no financial statements;
• the requested debt is disconnected from cash flow;
• management relies entirely on future projected revenue;
• the borrower has no credible repayment plan;
• existing liens are not disclosed;
• the company expects 100% debt financing for a high-risk transaction requiring equity;
• EBITDA depends heavily on unsupported adjustments;
• customer concentration is extreme and unexplained;
• the borrower refuses standard diligence;
• the transaction depends on refinancing debt that cannot be serviced; or
• the financing request is based primarily on the size of an opportunity rather than existing borrower credit.

Private credit can solve structural financing problems. It does not remove the requirement for a financeable borrower.

Information Required for a Senior Debt Raise

For an initial review, we normally want:

• last two to three years of financial statements;
• current year-to-date management accounts;
• monthly financials where relevant;
• debt schedule;
• existing financing agreements;
• collateral schedule;
• A/R aging where relevant;
• customer concentration;
• financial projections;
• requested facility amount;
• use of proceeds;
• transaction documents for acquisitions or other event-driven financings;
• ownership structure;
• management background; and
• proposed closing timeline.

The lender package should explain the credit in the same way a lender's underwriting team will eventually analyze it.

What Financely Does

Financely provides paid debt advisory and capital placement for companies seeking structured senior and private debt.

Depending on the mandate, our work can include:

• initial borrower screening;
• debt-capacity analysis;
• capital-structure design;
• senior versus junior debt analysis;
• collateral review;
• sources-and-uses preparation;
• financial model review;
• leverage and covenant analysis;
• lender-facing information memorandum;
• data-room preparation;
• bank and private credit identification;
• capital-provider distribution;
• term-sheet comparison;
• intercreditor structuring where several debt layers are required;
• due-diligence coordination;
• documentation coordination; and
• support through closing.

Senior Debt and Private Debt FAQ

What is the difference between senior debt and secured debt?

Senior refers primarily to priority in the capital structure. Secured refers to whether the creditor benefits from collateral. Debt can therefore be senior secured or senior unsecured.

What is first-lien senior debt?

First-lien debt generally has the senior-ranking security interest over the collateral covered by the lien, subject to applicable law and permitted claims.

What is senior unsecured debt?

It is debt that ranks senior to subordinated obligations but does not have a specific security interest in collateral. The lender relies primarily on the issuer's general credit.

What is private credit?

Private credit is debt provided through privately negotiated transactions rather than broadly distributed public debt markets. Funds can provide senior secured, unitranche, second-lien, mezzanine and specialty financing.

Is private credit more expensive than bank debt?

Frequently, because private lenders can accept leverage, complexity or structural requirements outside conventional bank parameters. Pricing still depends on borrower quality and transaction risk.

What is unitranche financing?

Unitranche combines senior and junior debt economics into one borrower-facing facility. Lenders can allocate first-out and last-out economics among themselves behind the facility.

Can a company obtain senior debt without collateral?

Yes. Strong companies can borrow on a senior unsecured basis where lenders are comfortable relying on general corporate credit rather than pledged collateral.

Can private credit fund acquisitions?

Yes. Acquisition financing is a major use of private credit. Lenders typically underwrite the combined company's earnings, leverage, integration risk, sponsor contribution and post-closing liquidity.

Can senior and mezzanine debt be used together?

Yes. Senior debt can fund the lower-risk portion of the capital structure while mezzanine or subordinated debt fills part of the remaining financing requirement. Intercreditor terms govern the relationship between those lenders.

How much senior debt can a business raise?

There is no fixed percentage. Debt capacity depends on cash flow, leverage, collateral, industry, concentration, existing obligations, transaction purpose and lender underwriting.

Need Senior or Private Debt?

If your company needs debt for an acquisition, refinancing, expansion, recapitalization or working-capital requirement, the first question is how much sustainable leverage the business can support.

Financely can review the company's cash flow, collateral, current debt, transaction purpose and capital structure before determining whether bank debt, private credit, ABL, unitranche or a layered financing is appropriate.

Submit the requested facility amount, use of proceeds, historical financials, current management accounts and debt schedule. Where the transaction fits our mandate criteria, we can quote the advisory and debt-placement work required.