What Is a Secured Creditor?

A secured creditor is any creditor or lender associated with an investment in or issuance of a credit product backed by collateral. Secured creditors have a first-order claim on the payouts of a distressed credit investment. If a borrower defaults on a secured credit product the secured creditors have a legal right to the secured asset used as collateral which can be seized and sold to pay off remaining obligations.

Breaking Down Secured Creditor

Secured creditors can be various entities. Financial institutions commonly issue secured loans to both consumers and businesses with acceptance of various types of collateral. Structured secured credit products also exist, commonly packaged in the form of syndicated loans and corporate bonds.

Secured credit is backed by designated collateral which gives the creditor first order rights to the collateral if a borrower is insolvent. The pledged collateral adds a second source of repayment for the creditor which leads to lower risk investment. In a secured credit deal the loan credit contract terms include a provision allowing the lender or lead underwriter to obtain a lien on the collateral property which gives them the ability to easily obtain legal approval from the courts to seize the property if payment terms are not met. Businesses with a low risk of default may commonly pledge various types of collateral in credit deals which allows them to obtain credit financing at the lowest possible rate.

Key Takeaways

  • Secured credit usually requires collateral in the event the borrower defaults.
  • Pledged collateral can lower the risk of investment.
  • Secured loans often have lower interest rates because of the lower risk.

Secured debt can be compared to senior debt in the capital financing structure. Most senior debt is secured debt however it can also be unsecured with senior payment provisions. Secured creditors can be confident that they will be paid if a borrower becomes insolvent. If a company liquidates, the collateral associated with a secured credit deal can only be used to payoff the secured creditors. Secured collateral would not be available to payoff unsecured senior loans. A company can generally offer a first lien or a second lien on collateral which allows them to potentially use specific collateral assets in two separate credit issuances.

Secured Personal Loans

Secured personal loans are a popular credit product available for borrowers in the credit market. Secured loans backed by collateral generally have a lower risk which results in lower interest rates. Common types of collateral accepted by secured lenders include real estate, cars, jewelry, and art.

Institutional Secured Loans

Secured loans to businesses are also a profitable offering for financial institutions. Businesses have a variety of options for pledged collateral in a lending deal. Often collateral will include real estate or equipment. Institutional loans may also be sold on the secondary market, offering new buyers the same collateral security.

Syndicated loans can also be structured to include provisions for collateral. In a syndicated loan, multiple investors are involved in a structured loan. The company and its underwriters may use collateral to offer certain investors lower risk terms or the entire syndicate may be backed by collateral to comprehensively lower the risk for all borrowers involved.

Secured Bonds

Corporate bonds are another credit product that can be backed by collateral to lower the risk. Corporate bonds are structured and issued on behalf of a corporation through an underwriter. Underwriters have the flexibility to build unitranche bonds with some or all of the tranches including collateral backing for lower risk. Similar to loans, bonds can also be sold on the secondary market after their primary issuance. In the secondary market, the collateral provisions remain in effect with secured bonds continuing to serve as a low risk investment.