Unsubordinated Debt

Unsubordinated Debt: What it Means and How it Works

Key takeaways
* Unsubordinated debt (also called senior debt or senior security) must be repaid before other claims in bankruptcy or liquidation.
* It is often secured by collateral and therefore considered less risky than subordinated (junior) debt.
* Because of lower risk and higher repayment priority, unsubordinated debt typically carries lower interest rates.
* Examples include many bank loans, certain high‑grade bonds, exchange‑traded notes (ETNs), certificates of deposit (CDs), and senior tranches of collateralized securities.

What is unsubordinated debt?
Unsubordinated debt is a claim on a borrower’s assets or earnings that ranks above other claims. Holders of unsubordinated debt have priority for repayment if the borrower becomes insolvent, so they are paid before preferred shareholders, subordinated creditors, and common shareholders.

How it works
* Priority: In a liquidation or bankruptcy, creditors are paid in an established order. Unsubordinated creditors are near the top of that order and are usually paid in full before lower‑priority claimants receive anything.
* Security: Much unsubordinated debt is secured by collateral (for example, mortgage bonds), which strengthens the lender’s claim on specific assets.
* Pricing: Because repayment likelihood is higher, investors accept lower interest rates than they would for subordinated debt, which faces greater risk of loss.
* Loan classification: Loans and securities may be deemed unsubordinated based on their contractual ranking, the presence of collateral, and their outstanding balance and tenure relative to other obligations.

Common types and structures
* Bank loans and high‑grade corporate bonds — typically treated as senior obligations.
* Certificates of deposit (CDs) — bank liabilities that are generally senior.
* Exchange‑traded notes (ETNs) — can be senior unsecured obligations of the issuer.
* Collateralized securities (e.g., mortgage‑backed securities) — structured into tranches; senior tranches have the highest claim on cash flows and the lowest risk, while junior tranches absorb losses first and pay higher interest.

Unsubordinated vs. subordinated debt
* Unsubordinated (senior) debt: Paid first, often secured, lower interest rates, lower risk.
* Subordinated (junior) debt: Paid after senior claims and preferred shareholders in many structures, higher risk, and therefore higher interest rates to compensate for that risk.

Practical implications for investors and issuers
* Investors seeking capital preservation and higher claim priority often prefer unsubordinated securities despite lower yields.
* Issuers use senior debt to access lower‑cost financing but must honor higher‑priority repayment commitments in distress scenarios.
* Understanding contractual ranking and collateral arrangements is essential when assessing recovery prospects in default.

Conclusion
Unsubordinated debt offers higher repayment priority and typically lower risk because of collateral and senior status. That priority reduces expected returns compared with subordinated debt, but it delivers greater protection for creditors in insolvency or liquidation events.