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Corporate Finance & M&A

Senior vs Subordinated Debt

Also called: seniority, subordination, debt waterfall

Seniority determines who gets paid first in a default, and the ranking drives almost everything about pricing. Senior secured debt claims specific collateral and recovers most; subordinated debt waits and typically recovers a fraction. Because the same company's obligations can span a 10% yield gap purely on ranking, capital structure arbitrage exists as a strategy in its own right.

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