A senior secured credit facility is a package of loans and credit lines, extended to a company by one or more lenders, that sits at the top of the repayment hierarchy and is backed by specific company assets. “Senior” means it gets paid before other debt. “Secured” means the lender has a direct legal claim on collateral if things go wrong. Together those features make it the lowest-risk form of corporate debt from the lender’s side, which is why borrowers pay less for it than they would for unsecured or subordinated financing. The cost of that lower rate is real: the company pledges assets, accepts ongoing financial restrictions, and hands the lender powerful remedies if it stumbles.
Why “Senior” and “Secured” Change the Economics
The two words in the name do most of the work.
Senior refers to rank in the repayment line. If the borrower files for Chapter 11, the bankruptcy court applies the absolute priority rule: no junior class of creditors or equity holders can receive anything under a reorganization plan unless every senior class has been paid in full or has agreed to accept less. Under 11 U.S.C. § 1129(b), a plan can be forced on a dissenting class only if it is “fair and equitable,” which for unsecured creditors means no junior interest holder receives property unless the senior class gets the full allowed amount of its claims. For secured creditors, the plan must let them keep their liens and receive deferred payments worth at least the value of their collateral interest.1Office of the Law Revision Counsel. 11 USC 1129 – Confirmation of Plan
Secured means the loan is tied to specific property. If the borrower defaults, the lender isn’t just one more creditor with a general claim; it has a direct right to seize and sell the pledged assets. Under 11 U.S.C. § 506, a secured claim is allowed up to the value of the collateral backing it, and anything above that value drops down into the unsecured pile.2Office of the Law Revision Counsel. 11 USC 506 – Determination of Secured Status That’s why appraisals and asset coverage ratios matter so much in the underwriting process. The collateral value sets the ceiling on how protected the lender actually is.
Common collateral includes commercial real estate, manufacturing equipment, inventory, accounts receivable, and intellectual property like patents. The combination of priority and asset backing is what puts these facilities among the safest corporate debt instruments a lender can hold.
What’s Inside the Facility
A senior secured credit facility is rarely a single loan. It’s a package of tranches, each with its own purpose and mechanics, bundled under one credit agreement with one set of covenants and one shared collateral pool. The tranches function independently in terms of draw, amortization, and pricing.
Revolving Credit Facility
A revolver works like a corporate credit card with a defined limit. The company draws when it needs cash, repays, and draws again across the commitment period. It’s the standard tool for working capital swings, seasonal revenue dips, and short-term funding needs. Interest accrues only on the amount outstanding, not the full commitment.
Most revolvers include two sub-facilities. A letter of credit sub-limit lets the borrower use part of its revolver capacity to have the bank issue standby or commercial letters of credit; each outstanding letter of credit reduces the cash borrowing availability, and the sub-limit itself typically runs 20% to 50% of the total commitment. A swingline sub-facility allows same-day or next-day borrowing in smaller amounts from a single designated lender, without routing through the full syndicate draw process. Swingline loans are short, usually five days or less, and settle against the main revolver.
Term Loan A
A Term Loan A funds in full at closing and amortizes over its life, meaning the borrower pays down principal in regular installments. Maturities typically run five to six years, with annual amortization between 5% and 20% of the original principal. Banks are the primary lenders for this tranche, and it shares the same credit agreement and covenants as the revolver. There’s generally no prepayment penalty, so the borrower can pay it down early at no extra cost.
Term Loan B
A Term Loan B targets institutional investors, collateralized loan obligation funds, hedge funds, and insurance companies rather than traditional banks. Maturities run longer (typically seven to eight years), scheduled amortization is minimal (often just 1% per year), and a large bullet payment lands at the end. The spread over the benchmark rate is higher than on a Term Loan A, reflecting the longer tenor and the investor base.
One important feature: Term Loan B tranches commonly include soft call protection for the first six to twelve months after closing. If the borrower refinances the loan during that window, usually to chase a lower rate, it owes a 1% premium on the repriced amount. After the call period expires, the borrower can repay freely. The protection exists because institutional investors priced the loan expecting a certain yield, and early refinancing undercuts that expectation.
Delayed Draw Term Loan
A delayed draw term loan is a committed facility where the lender agrees to fund a term loan, but the borrower doesn’t take the money at closing. Instead, it gets a defined availability window, often six to eighteen months, to draw when a specific need materializes like closing an acquisition or finishing a capital project. During the availability period, the borrower pays a commitment fee on the undrawn amount, similar to a revolver.3U.S. Securities and Exchange Commission. Delayed Draw Term Loan Credit Agreement Once drawn, the loan converts to a standard term loan with scheduled amortization.
How the Rate Is Set
Nearly every senior secured credit facility in the U.S. now prices its floating rate off the Secured Overnight Financing Rate, or SOFR, which replaced LIBOR as the benchmark. SOFR is published daily by the Federal Reserve Bank of New York and reflects the cost of borrowing cash overnight using U.S. Treasury securities as collateral.4Federal Reserve Bank of New York. Secured Overnight Financing Rate Most credit agreements reference Term SOFR, a forward-looking version based on futures markets, rather than daily SOFR. Term SOFR gives both sides certainty about the applicable rate at the start of each interest period.
The borrower’s actual rate is SOFR plus a credit spread, expressed in basis points. The spread depends on the company’s credit profile, leverage, and industry. Investment-grade borrowers might pay SOFR plus 125 to 200 basis points; leveraged borrowers typically pay considerably more. Many agreements use a pricing grid tied to a financial metric like the leverage ratio, so if the company reduces its debt relative to earnings, the spread steps down automatically.
Beyond the interest rate itself, revolving credit facilities charge a commitment fee on the undrawn portion of the credit line, generally between 0.125% and 0.50% per year. The fee compensates lenders for keeping capital available on short notice. A company with a $200 million revolver that’s only using $50 million still pays a fee on the idle $150 million.
Rules You Agree to Follow
The credit agreement doesn’t set the loan terms and walk away. It imposes ongoing behavioral and financial rules the borrower must follow for the life of the facility. These covenants are where most of the negotiation happens, and where most borrower headaches start.
Affirmative Covenants
Affirmative covenants are the things the company must do. Deliver audited annual financial statements and unaudited quarterly statements on time. Maintain insurance on pledged assets. Comply with applicable laws. Pay taxes. Preserve its corporate existence. Missing a reporting deadline can trigger a default even when every payment is current; a technical default like that gives the lender leverage to renegotiate terms or extract fees.
Negative Covenants
Negative covenants restrict what the company cannot do without lender consent. The main ones include limits on taking on additional debt, making acquisitions, selling major assets, paying dividends, making investments outside the core business, and granting liens on collateral to anyone else. Each restriction typically has negotiated baskets and carve-outs, so the company might be allowed to incur a certain dollar amount of additional debt or make acquisitions below a threshold without asking permission. The size of those baskets is a direct measure of how much operating flexibility the borrower kept during negotiation.
Financial Covenants
Financial covenants set numerical targets, tested quarterly. The most common are a maximum leverage ratio (total debt divided by EBITDA) and a minimum interest coverage ratio (EBITDA divided by interest expense). If earnings drop or debt rises enough to breach a ratio, the company is in default regardless of whether it can still make payments. These covenants function as an early warning system, designed to trigger before the company runs out of cash so the lender has a seat at the table while there’s still value to protect.
Some agreements, particularly for private equity-owned companies, include an equity cure right. If the borrower breaches a financial covenant, the sponsor can inject fresh equity within a defined window (commonly ten business days after delivering the non-compliant statements) to boost the EBITDA calculation back into compliance. These rights aren’t unlimited; agreements typically cap their use at two times in any rolling four-quarter period and three to four times over the life of the facility. The lender usually requires that cure proceeds go toward prepaying the loan rather than sitting in the company’s general accounts.
Material Adverse Change Clauses
Most credit agreements include a representation that no material adverse change has occurred in the borrower’s financial condition or business operations. This MAC clause can act as a condition to future revolver draws, or less commonly, as a standalone event of default. Courts applying the standard look for something more than a bad quarter. The deterioration needs to threaten earnings in a “durationally significant” way, usually measured in years rather than months. Because the standard is subjective, lenders rarely invoke a MAC clause as their primary default trigger. It’s more of a background pressure point during renegotiations.
When Things Go Wrong
When the borrower trips a covenant or misses a payment, the credit agreement’s default provisions take over. This is the section borrowers hope never to read closely, and the one they should understand best before signing.
The most straightforward default is a missed payment: failing to pay principal or interest when due. Most agreements give a short cure period for payment defaults, typically five to ten days. Non-monetary defaults like a covenant breach or a late financial filing usually get longer cure windows of 30 to 60 days before the lender can act.
A cross-default clause is one of the more dangerous provisions. It means defaulting on any other debt obligation (a separate loan, a bond, even a capital lease above a threshold amount) automatically triggers a default under the senior secured facility. The lender’s logic is obvious: if the borrower can’t pay someone else, the senior lender wants to act before collateral value evaporates. From the borrower’s side, a cross-default can turn a minor problem with one creditor into a company-wide crisis.
Once an event of default is declared and any cure period has expired, the lender’s main remedy is acceleration: declaring the entire outstanding balance immediately due and payable. Under the Uniform Commercial Code, a secured party after default can reduce its claim to judgment, foreclose on collateral, or otherwise enforce its security interest through any available legal process.5Legal Information Institute. UCC 9-515 – Duration and Effectiveness of Financing Statement In practice, that means taking possession of pledged equipment, sweeping bank accounts, collecting receivables directly from the borrower’s customers, and selling assets to recover what’s owed.
Before resorting to those options, lenders and borrowers frequently negotiate a forbearance agreement. The lender agrees to temporarily hold off on remedies without waiving any rights. The default remains in effect, the borrower typically agrees to pay default-rate interest, and the forbearance carries a hard expiration date. If the problem isn’t cured or a restructuring deal isn’t reached by then, all remedies snap back.6U.S. Securities and Exchange Commission. Forbearance Agreement Borrowers often give up the right to assert defenses or counterclaims against the lender as a condition of getting forbearance, a concession that can limit the company’s options if things deteriorate further.
How Collateral Actually Gets Locked In
Pledging collateral in the credit agreement creates a security interest between borrower and lender, but that interest doesn’t protect the lender against the outside world until it’s perfected. Perfection is the legal step that establishes priority against other creditors who might try to claim the same assets.
For most personal property collateral like equipment, inventory, receivables, and intellectual property, perfection requires filing a UCC-1 financing statement. The filing goes to the Secretary of State in the state where the borrower is legally organized, not necessarily where the assets physically sit. Under UCC § 9-307, a corporation or LLC organized under state law is considered located in its state of organization for filing purposes.7Legal Information Institute. UCC 9-307 – Location of Debtor A Delaware-incorporated company with factories in Ohio and Texas files the UCC-1 in Delaware. The filing creates a public record that puts other potential creditors on notice.8Legal Information Institute. UCC Financing Statement
A detail that borrowers and lenders sometimes overlook: UCC-1 filings expire after five years. If a continuation statement isn’t filed within the six months before that five-year anniversary, the filing lapses, the security interest becomes unperfected, and the lender loses its priority as if the filing never happened.5Legal Information Institute. UCC 9-515 – Duration and Effectiveness of Financing Statement For facilities with terms longer than five years, calendar management on continuation filings is not optional. Missing the deadline has cost lenders real money in actual cases.
The security interest also follows the collateral if it’s sold or transformed. Under UCC § 9-315, a lien continues in collateral even after the borrower sells, leases, or exchanges it, and automatically attaches to any identifiable proceeds the borrower receives.9Legal Information Institute. UCC 9-315 – Secured Party’s Rights on Disposition of Collateral If the borrower sells pledged equipment for cash, the lender’s lien transfers to that cash. The continuity rule prevents a borrower from quietly liquidating collateral and pocketing the proceeds.
Real estate collateral follows a different path. Instead of a UCC-1, the lender records a mortgage or deed of trust with the county recorder’s office where the property sits. Some jurisdictions impose a mortgage recording tax on commercial real estate liens, which can range from zero to nearly 3% of the loan amount depending on state and county. Government filing fees for UCC-1 statements are modest by comparison, typically between $5 and $60 per state.
When There’s Junior Debt in the Mix
When a company has both senior secured debt and junior secured or subordinated debt, the two lender groups sign an intercreditor agreement that governs who gets to do what. This document protects the senior lender’s position in ways that go beyond simple payment priority.
The junior lender typically agrees to a payment blockage, meaning it cannot receive payments on its debt if the senior facility is in default. The junior lender also surrenders its right to take enforcement action against the collateral (no foreclosing, no seizing assets, no collecting receivables) until the senior debt has been repaid in full.10U.S. Securities and Exchange Commission. Subordination and Intercreditor Agreement Even in bankruptcy, the senior lender controls the collateral disposition process. The junior lender waits in line.
These arrangements matter most during distress. Without an intercreditor agreement, a junior lender could race to seize assets or file involuntary bankruptcy petitions, destroying value for everyone. The agreement forces an orderly process. The order heavily favors whoever holds the senior position.