Bond ranking, or seniority, determines the order of repayment in the event of a default. In general, bond ranking order are as follows:
Secured debt Sitting at the top of the ranks are secured debt, which are bonds that are backed by collateral or company assets. In the event of a default, these assets will be sold and the money recovered will be used to pay off the holders of the bond.
Senior / Unsubordinated Bonds Next in line are senior bonds, which get the top priority in repayment during a default event.
Junior / Subordinated Bonds Ranked at bottom are junior bonds, which is why that are ‘subordinated’. Should a default occur, junior bonds are paid out last, using whatever remaining assets left after the senior debt has been repaid.
Equity Investors should also note that equity is considered subordinated to all forms of debt. In other words, equity is ranked lowest amongst any claim on a company’s assets. In a default event, equity holders get paid last, and in most cases, recover very little of their investments.