Senior Secured Debt
Senior secured debt is a loan that has priority in repayment and is backed by collateral, typically sitting at the top of the capital stack.
Allocator relevance: A core private credit building block—downside protection depends on collateral quality, covenants, and underwriting standards.
Expanded Definition
Senior secured loans rank first in a borrower’s capital structure and are secured by specific assets or claims. In default, they typically have higher recovery rates than subordinated debt. However, “secured” does not guarantee safety—collateral can be impaired, covenants can be weak, and recoveries can be slow or contested.
Allocators evaluate senior secured strategies by default-cycle performance, covenant enforcement capability, and concentration management.
How It Works in Practice
Managers originate or buy loans, negotiate covenants, and monitor borrower performance. Returns come from interest income and fees. Stress regimes test recovery processes and restructuring expertise.
Decision Authority and Governance
Governance includes underwriting standards, covenant policies, concentration limits, and escalation triggers. LPs diligence whether the manager can actively manage workouts.
Common Misconceptions
- Secured = low risk.
- Seniority guarantees high recovery in all cases.
- Covenant packages don’t matter in strong markets.
Key Takeaways
- Seniority helps, but underwriting drives outcomes.
- Covenant quality and enforcement matter.
- Diversification and risk limits protect portfolios.