senior debt
Senior Debt is the loan that gets paid back first if a company runs into trouble, before any other lender or shareholder sees a kobo.
In plain English
When people share a bag of rice at a family gathering, there is always an order. The eldest is served first, then the rest follow according to some understood pecking order that nobody argues with. Company debt works on the same calm logic.
Senior debt is the lender standing at the front of that queue. It is usually a bank loan, and it often comes with collateral attached, like property, equipment or inventory the company owns. Because the lender takes the least risk, it charges the lowest interest rate of all the money a company borrows.
Say a Lagos logistics company borrows ₦200,000,000 from a bank to buy delivery vans, and separately raises another ₦100,000,000 from investors through a bond that ranks behind the bank loan. If the business struggles and its assets are sold off, the bank collects its ₦200,000,000 first. Whatever is left, if anything, goes to the bondholders. Shareholders, who sit at the very back of the queue, may get nothing at all.
This is why senior debt is called senior. And not since the lender is older or wiser, but because their claim on the company's assets sits above everyone else's in the event things go wrong. Junior debt, sometimes called subordinated debt, waits behind it, and equity waits behind that.
For a diaspora Nigerian thinking of investing in a company's bonds, this distinction matters a lot. A bond described as senior secured is a safer bet than one that is junior or unsecured, because senior status tells you where you stand if the worst happens.
Lenders love this arrangement because it lowers their risk. Companies accept it because senior debt is usually cheaper to service than other forms of financing, even though it comes with stricter conditions attached.
A Lagos manufacturing firm takes a ₦150,000,000 senior secured loan from a bank, backed by its factory equipment. It also owes ₦50,000,000 to a supplier on flexible terms. When the firm hits financial trouble and its equipment is sold for ₦120,000,000, the bank recovers its money first, in that order, before the supplier sees anything.
Questions people ask
Why is senior debt cheaper than other loans?
Because the lender takes less risk. Since senior debt gets repaid first if things go wrong, and is often backed by collateral, banks are willing to charge lower interest for it than they would for riskier, unsecured lending.
Is senior debt always secured by collateral?
Not always, but very often yes. Many senior loans are backed by specific assets like property, equipment or receivables. This is what makes them senior secured debt, which sits at the very top of the repayment queue.
What happens to senior debt if a company becomes insolvent?
Senior lenders get first claim on whatever assets remain after the company folds. They are repaid before junior debt holders and long before shareholders, who typically absorb the losses if there is nothing left.
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