
Founder and Chairman
Avante Capital Partners
Senior and junior debt providers frequently work together within a borrower’s capital structure, so a harmonious relationship between the lending parties is the key to a beneficial outcome. Jeri Harman of Avante Capital Partners and Alan Chen and Kate Jenks of Caltius Structured Capital provide a refresher course on the difference between the two types of lending and important considerations to ensure a successful partnership. They also share their thoughts on how the COVID-19 pandemic has shifted the market and the outlook for junior debt providers.

Vice President
Caltius Structured Capital
senior and junior lenders differ in the structures and terms they provide. According to Alan Chen, vice president of Caltius Structured Capital, and Kate Jenks, an analyst at Caltius Structured Capital, junior lenders do not require scheduled paydowns like senior lenders, but they charge a higher interest rate, usually falling in the low teens compared with the low single-digit rates from their senior counterparts. On top of that, junior lenders frequently require an “equity kicker” such as a minority equity co-investment.
“Junior debt does not require personal guarantees, contractual paydowns and assets to determine the amount and features of a loan,” Jenks says. “Junior debt is longer-term, partner-like capital that is structured to be flexible for the company to comfortably operate during periods of stability or investing for growth.”
Analyst
Caltius Structured Capital
A variance in risk tolerance is at the heart of the divide between senior and junior lenders. Senior lenders are inherently more conservative in their approach, particularly since many are at the mercy of regulators, according to Harman, who notes that senior lenders are generally focused on a timely return. In addition, she says that different considerations should be made when working with senior cash flow lenders compared with senior asset-based lenders. Regardless of the type of senior lender, however, the bottom line remains the same.
From the borrower perspective, the differences between these types of lenders must be factored into the decision-making process when selecting the right capital provider or providers.
Factors to Consider
Evaluating capacity means determining whether the senior lender will be able to “provide additional capital for growth initiatives,” according to Jenks. The relationship factor speaks to whether there is a prior history of cooperation between the senior and junior lender. When it comes to flexibility, a junior lender must determine how a senior lender will react during challenging times. Lastly, looking at the terms and economics of the combined capital/debt will determine how beneficial such a combination will be for the borrower as well as the providers themselves.
“Like everything, senior/junior lender relationships work best when there is substantial and frequent communication from the initial loan evaluation through exit/repayment,” Harman says. “It is especially important when things don’t go as expected. The ability of the senior and junior lenders to work together constructively on a unified front to combat the issues will generally work in both of their favors.”
“Junior lenders have to keep in mind that the senior lenders are not being paid to take more risk and will be very focused on anything that increases the credit or business risk and could impact the company’s ability to pay back the senior debt,” Harman says.
The COVID-19 pandemic has dramatically shifted the marketplace for businesses and the capital providers who serve them. For junior lenders, this means changes in perspective, credit appetite and the types of businesses that will be given consideration.
Conservatism will not just be felt in deal terms but on the credit evaluation side, as junior lenders employ greater scrutiny when evaluating potential opportunities.
However, this environment may be increasing the appetite of borrowers for junior capital solutions, which is being driven at least partially by the private equity community.