Legal Definitions - senior security

Senior security refers to a type of financial obligation or investment that holds a preferential claim on a company's assets and earnings compared to other, "junior" or "subordinated" securities. In the event of a company's liquidation, bankruptcy, or default, holders of senior securities are among the first to be repaid from the company's available assets, before holders of junior debt or equity. This higher priority typically makes senior securities less risky for investors, though they may offer lower potential returns than junior securities.

• Example 1: Corporate Bonds

  A large technology company issues two types of debt: "Senior Notes" and "Subordinated Debentures." The Senior Notes are backed by a general claim on the company's assets, while the Subordinated Debentures explicitly state that their repayment is secondary to all other senior debt. If the company were to face severe financial difficulties and default on its obligations, the holders of the Senior Notes would have a priority claim to be repaid from the company's available assets before any funds could be distributed to the holders of the Subordinated Debentures. This makes the Senior Notes a form of senior security.

• Example 2: Real Estate Mortgages

  A homeowner obtains a primary mortgage from Bank A to purchase their house. Several years later, they take out a home equity line of credit (HELOC) from Bank B, which is secured by the same property. The mortgage from Bank A is the senior security. If the homeowner defaults on both loans and the property is foreclosed upon and sold, the proceeds from the sale would first be used to fully satisfy Bank A's claim. Only after Bank A has been completely repaid would any remaining funds be available to Bank B, whose HELOC is a junior security.

• Example 3: Business Bankruptcy

  A struggling retail chain files for bankruptcy. Among its many creditors are a bank that provided a large secured loan (collateralized by the company's inventory and real estate), various suppliers (unsecured creditors), and bondholders who hold "junior lien" bonds. In the bankruptcy proceedings, the bank's secured loan represents a senior security. The bank would have a priority claim on the specific assets pledged as collateral for its loan, meaning it would be among the first to recover its investment from those assets, ahead of the unsecured suppliers and the junior lien bondholders.