Corporate bonds and the creditor hierarchy

Bond Types and Structures · Bonds Explained

Locate the legal claim

A corporate bond can be issued by an operating subsidiary, a parent company or a financing entity. Their names may look similar while their access to assets differs. Read which entity owes the money and whether another entity guarantees it.

Secured debt has a claim against specified collateral. Unsecured debt relies on the issuer’s broader credit. Subordinated debt ranks behind specified senior claims. The governing documents and applicable insolvency rules determine the details.

Use a simplified recovery waterfall

Imagine a hypothetical company with $70 million available for creditors after costs and any claims that must be paid first. It owes $40 million of senior debt and $50 million of junior debt. If the simplified priority structure pays senior debt first, that class receives $40 million. Only $30 million remains for the junior class, equal to 60% of its claim.

This is a teaching model, not a prediction about a real bankruptcy. Collateral restrictions, guarantees, restructuring negotiations and jurisdiction can change both the distribution and the time it takes to receive it.

Distinguish probability from severity

Two bonds from the same borrower can share exposure to the same business failure but have different recoveries. An issuer assessment and a security assessment therefore answer different questions. A strong looking asset pool is useful only if your claim can reach it.

A higher coupon may compensate investors for weaker priority or additional restrictions. It is not evidence that the junior bond is a bargain.

Read the protective terms

Check debt limits, asset sale rules, restrictions on distributions, events of default and the permitted use of collateral. These covenants can protect creditors, but the exact wording matters. Record important exceptions and whether the structure allows new claims ahead of yours. Then connect the contract to the issuer’s actual cash generation.

Try it yourself

In the simplified example, how much would the junior class recover if only $55 million were available after prior costs?

Show the worked answer

After paying $40 million to senior debt, $15 million remains. That equals 30% of the $50 million junior claim. Actual proceedings can differ from this simplified waterfall.