Senior or total debt

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Whether senior or total debt (senior + subordinated/mezzanine) debt is used for covenants will depend on the financial structure of the borrower and which lender you are talking about. Subordinated/mezzanine lenders, if they have financial covenants at all, are most likely to be interested in total debt, plus potentially having a senior debt covenant if senior lenders have one. Senior lenders will usually be most interested in senior debt ratios, but this depends on how deeply subordinated the other lenders are (such as through the subordinated debt being structurally subordinated through being loaned to a parent company rather than the same entity as the senior debt). If the subordinated lenders have no ability to accelerate their debt repayments or trigger an insolvency event and little ability to enforce any security, then there is little risk for senior lenders in having additional subordinated debt and so they are more likely to rely solely on senior debt covenants.

If however, both senior and subordinated lenders are dealing with the same borrower, subordinated debt has enforcement rights, the ability to restrict payments, and/or financial covenants, senior lenders will be interested in total debt covenants, as their security of repayments is affected by how much subordinated debt is in place.

Brendan WalpoleSenior or total debt

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