A type of fixed-income security that provides investors with a higher level of protection compared to unsecured debt securities., in addition to its seniority, ranking as a debt instrument above other classes of debt instrument in terms of claims on an issuer’s assets or earnings in case it (the issuer) falls into liquidation or bankruptcy. Senior debt instruments represent the debt tranches higher in priority of repayment compared to unsecured debt instruments.
In addition to its seniority, such a security is backed by certain assets or collateral that serve as a guarantee for the investors (holders). By having collateral tied to the instrument, the issuer limits the potential losses that investors may face in case of default. Specifically, in the event of default, the collateral (collateralized assets) can be seized and liquidated to repay the investors.
An example of senior secured debt instrument is a covered bond.
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