Junior subordinated loans

Junior subordinated loans are subordinated in their rights to receive principal and interest payments from the borrower to the rights of the holders of senior debt and senior subordinated debt.
The risk profile of junior subordinated debt is high, which permits the junior subordinated lender to obtain higher interest rates and warrants to purchase a greater portion of the borrower’s stock.

Senior Term Loans

Using the assets and cash flow of the underlying business as collateral, a business typically uses senior debt to cover a substantial portion of the funding needed to operate.
Senior loans are exposed to the least risk of debt because they command a senior position with respect to scheduled interest, principal payments and collateral. However, unlike senior subordinated and junior subordinated loans, these senior loans typically do not entitle the lender to obtain any stock or warrants to purchase stock of the borrowers. As such, senior loans generally do not participate in the equity appreciation of the value of the business.

Senior Subordinated Loans

Senior subordinated loans or last-out-tranche loans are typically subordinated in their rights to receive principal and interest payments from the borrower to the rights of the holders of senior debt. As a result, senior subordinated debt is riskier than senior debt.
Although such loans are sometimes secured by significant collateral, many of these loans principally rely on the borrower’s cash flow for repayment. Additionally, lenders receive warrants or other yield enhancements to acquire shares of stock in borrowers in connection with these loans.