Senior Debt

Senior debt is provided by banks or credit funds usually on an asset collateral basis. Senior debt is also available on a cash flow basis in the form of private credit cash flow loans. Senior debt has the highest priority on collateral of all the lenders making it the most senior layer of capital. It is secured with a first lien on all assets and usually a personal guarantee. Due to its low risk, senior debt is the lowest priced debt layer in a transaction structure containing senior debt and mezzanine debt. Over the years, banks have become increasingly regulated which has made their senior debt less attractive to prospective borrowers. Banks are still the primary go-to source of lending for lines of credit; however private credit lenders have become the primary source of senior debt for founder-owned companies.

Private credit lenders provide senior debt on a cash flow multiple basis which is usually in the 3.0 to 3.5 times, giving borrowers more capital at close. Private credit senior debt structures also include delayed draw term loans which can be accessed in the future to support future capital needs. Bank senior debt providers cannot provide delayed draw functionality to their borrowers. Senior debt plays a key role in acquisition financing such as a leveraged buyout, due to its low cost. Equity investors and acquirers can usually raise senior debt to cover at least 40% to 60% of the acquisition price, thereby reducing the amount of equity to invest and increasing overall returns. Senior debt lenders are focused on return of principal and cannot assume risk due to their low interest rates. They will only fund into transactions where a buyer is investing a significant amount of equity.