Senior Debt
Senior debt is the layer of a company's borrowing that ranks first: secured on the company's assets and shares, repaid before every other creditor and the shareholders, and therefore the cheapest money in the structure. Banks and, increasingly, private credit funds provide it; it is sized at a multiple of EBITDA, protected by covenants, and in a buy-out it is the largest single source of the price.
- Also known as
- Senior secured debt, Senior loan, First-lien debt
- Used at
- every leveraged acquisition; corporate term loans and revolving facilities; the "A" and "B" term loans of a buy-out (amortising and bullet)
- Binding
- a facility agreement with covenants, a security package (fixed and floating charges, share pledges) and an intercreditor agreement ranking it above junior debt
- Typical terms in 2024–2025
- 3–4.5× EBITDA; margins of 3–5% over the base rate for mid-market buy-outs; 5–7-year maturity; a revolving facility alongside for working capital
- Typical lenders
- banks (clubs of two to five for mid-market deals), private credit funds (often the whole senior tranche as a unitranche), and the syndicated loan and CLO markets for large deals
- Parties
- the borrower, the lenders and their agent, the security trustee, and — for a regulated fintech — the regulator, whose capital rules limit what the licensed entity may pledge or pay
How senior debt works in practice
A sponsor buying a payments company for €200m raises €90m of senior debt: a €60m term loan B repayable at maturity in seven years and a €30m term loan A amortising over five, at 4% over the base rate, plus a €15m revolving facility. The lenders take security over everything — the shares of the acquisition vehicle and the operating companies, the bank accounts, the receivables, the intellectual property — and covenants that test leverage and interest cover quarterly. The debt is serviced from the company's cash flows before anything reaches the mezzanine or the equity, and if the company fails, the senior lenders' security means they are paid first from whatever is sold.
The lenders' analysis is the cash flow's stability: how much EBITDA there is, how much of it is recurring, what happens to it in a bad year, and how quickly the debt can be repaid. A payments company with contracted merchant revenue borrows more than a lender whose EBITDA depends on credit losses; a software company with 90% recurring revenue borrows more than either. The multiple is the market's answer, and it moved from 6–7× in 2021 to 4–4.5× in 2023 as rates rose and the same interest bill supported less debt.
For a licensed fintech the security package has a hole the lenders must accept: the regulated entity's capital cannot be pledged or upstreamed without the regulator's consent, so the senior debt sits at the holding company, secured on its shares, and serviced from permitted dividends.
Example
The €90m senior facility above: €30m of term loan A amortising at €6m a year, €60m of term loan B due in year seven, all at 4% over a 3% base rate — €6.3m of interest in year one. The company's €20m of EBITDA, less €3m of tax and €2m of capex, leaves €15m: €6.3m of interest, €6m of amortisation, and €2.7m retained. Covenants: leverage under 5.0× stepping to 3.5×; interest cover above 2.5×. In year three EBITDA is €26m and net debt €66m — 2.5× — and the sponsor refinances: a new €110m facility at a lower margin repays the old debt and the mezzanine and funds a dividend. The senior lenders were repaid in full three years early with a prepayment fee of 1%, which is the outcome they underwrite for.
Common mistakes
- Sizing senior debt on adjusted EBITDA the lenders' definition will not accept. - Security that includes the regulated entity's assets without asking the regulator. - Amortisation that consumes the cash flow the plan needed for growth. - A revolving facility too small for the working capital swing, so the company breaches by paying its suppliers. - Reading "senior" as "safe": the senior lenders are paid first from what is left, and in a fintech what is left may be a licence that lapses.