What is Junior Debt
Junior debt is debt that has a lower priority for repayment than other debt claims in the case of default. Junior debt is considered to be a type of subordinated debt.
BREAKING DOWN Junior Debt
Junior debt is a classification that is important for investors to understand when investing in credit issuances from a firm. Repayment priorities for a business are a part of the firm’s capital structuring. Companies can issue a wide variety of credit products to investors for raising capital. The structuring of these products is typically done by an underwriter.
Generally, the corporate debt market is much less structured than the equity market. Thus corporations have a lot more flexibility obtaining capital through debt. A corporation may work with a bank to obtain a loan. They may also work with an underwriter who leads a loan syndicate with multiple investors investing in a loan deal. A corporation may also issue bonds with varying repayment terms.
Debt Repayment Terms
An important repayment term for all types of credit is their repayment seniority. Loans and bonds can be issued as senior debt or subordinated debt. Senior debt is repaid first if the borrower encounters a default or liquidation. It is usually secured debt with collateral however it can also be unsecured with specific provisions for repayment seniority. Subordinated debt follows senior debt and has its own repayment terms. Generally, senior debt requires lower interest payments and bond coupons since it has a lower risk. With subordinated debt, investors are willing to take on the higher risk of lower seniority payments in default by being compensated with higher rates of interest. Generally, junior debt and subordinated debt is unsecured debt that is not backed by collateral.
Debt Market Trading
Different from equity capital, institutional debt is typically issued in the primary market involving direct interaction between corporations and investors. Following primary market issuance, loans and bonds can then be traded on over the country secondary markets with trades facilitated through various trading groups. In the secondary market senior debt continues to carry less risk than subordinated debt.
Subordinated Debt Issuance
Junior debt can be synonymous with subordinated debt or it can refer to a second tier of debt paid immediately following the repayment of senior debt. Junior debt has a smaller probability of being paid back in default since all higher-ranking debt will be given priority.
In some situations, corporations may issue junior debt bonds. Junior debt can also be common in unitranche bonds where investors have the option to invest in varying bond tranches as part of bond issuance. Repayment terms are often a key factor that can influence coupon rates on a bond. The junior debt repayment procedures in the case of default will be clearly delineated by the underwriter in the terms disclosing the investment details of a bond investment so that investors have a clear understanding of the priority the bonds are given in the case of default.