Meaning
Formal documentation defines the rights and obligations of a company and its primary lenders for a top tier debt obligation. The senior credit facility terms establish the interest rates, repayment schedules and the security interests that protect the bank’s investment. This agreement takes precedence over other forms of debt in the event of a liquidation.
Priority Status
Lenders holding these notes are the first to receive payment from the cash flow or assets of the borrower. Specific senior credit facility terms often prohibit the company from taking on additional debt that would rank equal to or higher than the current loan. This seniority reduces the risk for the institution and usually results in lower interest rates.
Priority lenders maintain the strongest claim on all corporate assets.
Covenant Structure
Financial health is monitored through a set of ratios that the borrower must maintain. The senior credit facility terms include requirements for leverage ratios and interest coverage that act as an early warning system.
Operational Restriction
Certain clauses limit the ability of management to sell assets, make acquisitions or pay dividends without lender approval. These senior credit facility terms ensure that the cash generated by the business is used primarily to service the debt and maintain operations.
