What is Junior Debt?

Junior debt is any type of loan or bond that has a lower payment priority than more senior debt claims in the event of a default by the issuer. In addition, junior debt tends to not be backed by any collateral at all. This positioning makes junior debt more risky for investors, so they will only invest if they can obtain a higher interest rate than on the more senior debt. The repayment priority given to senior debt may use up all of the issuer’s assets in the event of a default, leaving no funds for the repayment of junior debt. Therefore, depending on the amount of senior debt outstanding, junior debt could be extremely risky for an investor to hold.

An investor that acquires junior debt is more willing to accept risk in order to generate a higher return on investment. Other entities with lower risk profiles, such as pension funds, are much less likely to invest in junior debt.

When a business is issuing bonds to investors, it will clearly state in the terms of the arrangement the order in which the issuer’s debt will be repaid in the event of a default.