Senior Debt: What is Senior Term Debt?

Senior Debt and Capital Stack Overview

This section discusses senior debt within the capital stack, outlining its position in terms of priority and return profile compared to subordinated debt and equity.

Senior Debt Components

• Senior debt is positioned at the top of the capital stack, followed by subordinated debt and equity, indicating priority from top to bottom. The return profile inversely correlates with priority, with equity offering the highest returns.

• Components of senior debt typically include a revolving line of credit facility and various tranches of term loans (A, B, C). Senior debt can represent up to 50% of acquisition funding, translating to around 2 to 3 times debt-to-EBITDA ratio for stable businesses.

Role of Senior Debt in Enhancing Equity Returns

• Senior debt plays a crucial role in enhancing equity returns over time as the business grows. As the business expands over three to five years, equity value significantly increases while senior debt decreases due to repayments. Subordinated debt remains constant.

• Private equity firms achieve internal rates of return (IRRs) ranging from 20% to 30% by ensuring upfront equity investments deliver adequate IRRs. Funding gaps are often filled with subordinated debt when senior debt is maximized and required equity is invested.

Importance of Financial Courses for In-depth Understanding

This part emphasizes the significance of financial courses for a deeper understanding of concepts related to corporate finance.

Recommended Financial Courses

• Taking courses like Fixed Income Fundamentals can provide detailed insights into bond pricing and yield-to-maturity calculations essential in understanding financial structures such as senior debt.