A senior issue is an issue of preferred stock or some type of bonds that have a higher priority on the assets of the issuer in the event of some type of financial disaster, such as a company shut down or a bankruptcy. With this type of priority securities, investors holding those stocks or bonds have first claim on the earnings or any assets that are held by the issuing company. While granted priority over other forms of stock, a claim on a senior issue is limited by the amount of cash that can be generated by liquidating those assets.
With a senior issue, investors are likely to see a larger return on their investors, should the company experience financial difficulties. Before investors holding any type of junior issue such as common stocks or less classes of shares, shareholders with senior issue shares would have prior claim on assets like dividends or interest payments. With a bankruptcy where the idea is to close the company and use the proceeds to settle the company’s debts, this would mean that those with senior issue securities would receive a court-ordered amount based on the assets raised by the liquidation of those assets. While it is not usually possible to provide investors with a full return in the event of a bankruptcy, the level of return on senior issue shares will be somewhat higher than on other types of shares or claims.
The exact level of priority that a senior issue possesses will often depend on the type of financial crisis that the issuing company is facing, and the type of protections that investors and the company in question have under current laws. In some situations, if the company files bankruptcy and is considered a debtor in possession by the courts, there is often the intention of attempting to salvage the business and restore profitability. If that is the case, then the courts may allow the company to contract with new lenders who in turn are granted top priority in terms of claims on company assets. This would create a situation where the senior issue, while still having priority over other creditors or investors holding junior securities, would be considered only after the more recent creditors are satisfied.
In order to understand just what type of rights are connected with senior issue shares of stock, it is important to read and understand the information provided on the stock certificates. The data found there is usually in compliance with trading regulations that apply to the shares, and with the information included in the issuer’s articles of incorporation. At the same time, investors would want to consult with investment professionals to get an idea of how different scenarios would impact those rights, and possibly cause their prior claim to be superseded by some other type of creditor.
