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The seniority of a credit facility mainly dictates its importance in the hierarchy of loans that a company is responsible for. A senior credit facility is secured (i.e. there is company collateral insuring the loan in the eyes of the lender). Legally speaking in the event of company collapse, a senior secured loan will be paid off through the sale of the collateral asset(s) before other more junior loans can claim assets.
Furthermore, if the company is still functional but has defaulted on a loan from a senior facility, the lender can enforce the sale of the asset to make repayments. Although rare, it is also possible during a company’s liquidation for new lenders to fund the ongoing operations of that company and actually enforce a so called ‘super-seniority’ status over assets. This super-seniority can displace the seniority of existing senior credit facilities.
Senior Facility Terms
As one might imagine, for a contract to give the lender power over the sale of collateral assets, the lender must be sure that no other lenders have interests in those assets (usually known as a first lien). Misleading lenders over the control of assets would be deemed financial crime.
With corporate senior loans, the ‘assets’ that go towards securing the loan usually aren’t physical; they mostly take the form of securities or bonds giving sole control over certain financial assets. In some cases, lenders won’t even lend against otherwise available assets if the company has any other senior credit facilities at all.
Sometimes, the strict terms surrounding senior facilities dictate that portions of profits and effective capital gains for the company must be first dedicated to paying off minimum amounts of the secured loan before they can be used elsewhere in the business.
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Despite the strict terms usually employed by senior credit facilities, resulting in senior debt, they can be very beneficial for asset rich companies with limited credit histories or for companies who are looking to negotiate very specific terms between themselves and the lender.
The private nature of the negotiations facilitates this. Similarly, the secured nature of this loan type often means that companies can borrow much larger sums of money or indeed borrow with much more forgiving rates, as the financial institution views the loan as low risk.
In the sense of the repayment commitment hierarchy that a company has in place, senior facilities can actually encapsulate other subcategories of credit facility.
For example, revolving credit facilities are often also senior credit facilities. In fact more than one subcategory of facility can be part of a larger senior facility. For example, global manufacturing giant Tenneco Inc. has a senior credit facility that amalgamates a $1.6bn revolving credit facility and a $400m term loan A facility.
The fact that a senior credit facility can exist giving beneficial rates and volumes but also be comprised of a revolving facility giving the company great flexibility demonstrates that the strict terms of the senior loan facility don’t dictate that they can’t be very powerful agreements for both financial institution and loanee.