What Is a Senior Phrase?
A senior phrase is a kind of bond that takes precedence over other cash owed throughout the event that the company declares bankruptcy and is burdened into liquidation. On account of they communicate a lower level of risk, senior notes pay lower rates of interest than junior bonds.
Key Takeaways
- Senior notes are bonds that are supposed to be repaid quicker than most other cash owed throughout the event that the issuer declares bankruptcy.
- That makes senior notes further secure than other bonds.
- That higher level of coverage way patrons earn slightly lower interest rates.
Figuring out the Senior Phrase
Senior notes in most cases have shorter maturity cases than other bonds. The time lengths vary in line with the issuer:
- Corporate senior notes mature in 10 years or a lot much less
- Municipal bond senior notes mature in three hundred and sixty five days or a lot much less
- U.S. Treasury senior notes mature in two to 10 years
Senior notes would most likely or might not be backed by way of particular belongings which could be pledged as collateral. Therefore, throughout the event that the company is burdened into liquidation, holders of unsecured senior notes may not recoup their elementary and past-time in whole.
Convertible senior notes may be held to maturity or reworked into shares of the company’s common stock.
If a liquidation occurs, secured debt is repaid first by way of selling the collateral backing the debt, then senior note-holders are paid, then holders of other unsecured debt, if any belongings keep.
How Bonds Are Rated
Standard & Poor’s and Moody’s Buyers Supplier, the two greatest bond rating companies, rank bonds in keeping with their judgment of the issuer’s ability to repay the basic and the pastime expenses on time. The rating for a senior phrase, like other bonds, is in keeping with the creditworthiness of the issuer, at the side of its ability to generate consistent income with which to finance debt expenses.
Machine for Rating
A commonly-used method that rating companies employ to investigate creditworthiness is the pastime coverage ratio. This method is printed for the reason that ratio of income quicker than pastime and taxes divided by way of pastime expense.
This ratio bureaucracy how so much in income the company generates, as a a couple of of pastime expense. The larger the ratio, the additional profits an organization generates that can be used to make pastime expenses.
Convertible Senior Notes
Some senior notes are convertible into shares of the issuer’s common stock. If that is so, patrons would most likely make a selection to hold senior notes until maturity or to turn into the notes proper right into a specified choice of common stock shares.
For example, let’s assume {{that a}} $1,000 senior phrase has a conversion risk that allows an investor to turn into their protective into 20 shares of common stock. If {the marketplace} price of the typical stock is $60 in line with share, the investor can convert the senior notes into shares value $1,200. The investor then owns equity throughout the company instead of proudly proudly owning debt.
Senior Phrase Vs. Senior Debt
A senior phrase is not the identical issue as senior debt, even supposing the words are often used interchangeably. Senior debt is a broader time frame that is used to give an explanation for all of a company’s cash owed that have priority status throughout the event of bankruptcy. Most senior debt is collateralized.
