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Doesn't the senior most debt agreement carry the most restrictive covenants, hence if complying with those covenants we should not worry about the other agreements?

I would like to know more about senior debt vs junior debt covenants and how one affects the other.

This question was asked by an attendee during the Proformative webinar "Best Practices in Debt Compliance & Case Study" held on March 28, 2013. Join the discussion and add your insights below.


Barrett Peterson
Title: Senior Manager, Actg Stnds & Analysis
Company: TTX
(Senior Manager, Actg Stnds & Analysis, TTX) |

Seniority is typically based on the sequence of liens on assets or collateral held, more that covenants, although senior debt covenants will usually require specific subordination clauses in junior debt agreements or preclude issuance of such debt. Senior debt agreements drive the language of junior agreements as a condition for permitting additional debt. The amount of additional debt is almost always limited, with additional covenant requirements regarding defined capitalization ratios and interest coverage ratios.

Jeffrey Wallace
Title: Managing Director
Company: Debt Compliance Services LLC
(Managing Director, Debt Compliance Services LLC) |

It all depends. Junior debt that was written at a different time than your senior debt under different credit market conditions with the company's credit standing being different can have permitted baskets or ratios stronger than the senior credit. Also, there may be covenants peculiar to that type of agreement. Also, the non-financial covenants can easily be different.

Topic Expert
Joseph Ori
Title: CEO
Company: Paramount Capital Corporation
(CEO, Paramount Capital Corporation) |

It depends on the cos credit and when the debt is issued. If senior and sub debt are issued together, the senior will usually have more restrictive terms/covenants. If sub debt is placed on after the senior, it will probably be more restrictve due to higher risk and more demands by sub issuer.

Topic Expert
Lee Andrews
Title: P/T CFO, Business Consultant
Company: Pacific Bag, Inc./Other Clients
(P/T CFO, Business Consultant, Pacific Bag, Inc./Other Clients) |

The senior debt does not necessarily carry the most restrictive covenants. The previous responders have explained that well. You should address, project and monitor each of the lenders' covenants as distinct debt service issues. Often, failure of one lender's covenants will trigger a default in other debt, even if that covenant did not appear on the other lender's loan agreement. Be safe -- treat them separately and meet them all if you can.

Topic Expert
Wayne Spivak
Title: President & CFO
LinkedIn Profile
(President & CFO, |

You can't disregard covenants in a contract just because another contract that you signed is senior or junior.

You have a contractual obligation (unless the junior debt has language to the contrary) with every agreement, period.


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