What is a ‘Senior Security’
In the event of a company’s bankruptcy or liquidation, a senior security is one that ranks highest in the order of repayment before other security holders receive a payout.
BREAKING DOWN ‘Senior Security’
With respect to a company’s capital structure, seniority refers to the order of repayment to security holders in the case of a default by the issuing corporation. Each type of security issued by a company has a specific seniority or repayment ranking, with holders of senior secured bond debt having the privilege of getting paid first, before other security holders. Within this seniority hierarchy, secured bonds, which the issuer has backed with collateral, must be repaid before subordinated or junior bond debt is repaid. After bondholders are repaid, preferred stockholders have repayment seniority over common stockholders.
Because of its greater degree of safety, a senior security will generally offer lower returns than securities below it in the seniority hierarchy. Common stock, which is the least senior security in a company’s capital structure, generally offers investors the highest potential returns to compensate for this additional degree of risk.