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Senior Unsecured Bond

Category — Bond Types
Senior Unsecured Bond is a direct debt obligation of the issuer, which gives its holder a preferential right over the holders of subordinated bonds to the assets and income of the corporation in the event of its bankruptcy, while this type of bond is not backed by any assets.

In the event of initiation of bankruptcy proceedings and the occurrence of defaults on obligations, the court ranks the company’s debt by priority of payments and requires the debtor to repay the debt based on the existing assets of the organization. The claims of the holders of senior (non-subordinated) bonds are satisfied in the first place, before payments to the holders of subordinated bonds, preferred shares and ordinary shares.

Senior unsubordinated bonds by type of collateral are divided into secured and unsecured bonds. Secured bonds are backed by the assets of a firm. The issuer remains the owner of this assets during the entire circulation period of the bond, but if it fails to fulfill its obligations, the creditors receive the right to this property - it is sold by the issuer and the bonds are redeemed with the received funds.

Unsecured bonds, on the contrary, are secured not by specific assets of the enterprise, but in fact by the general solvency of the issuer. The interests of holders of unsecured bonds can be protected by the inclusion of a number of covenants in the terms of the issue. The most popular is the “Negative pledge” covenant (also known as “Limitation on Liens”), which prohibits the issuer from pledging existing assets to other creditors.

The issuers of senior unsecured bonds are typically large financial institutions, investment-grade non-financial issuers, international organizations, and sovereigns.
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