A super senior debt security is a debt security that has the highest priority of payment in the event of a default. This means that super senior debt holders will be paid in full before any other debt holders.
Super senior debt securities are often used in securitisations to provide additional credit enhancement. This means that they help to reduce the risk of default on the securitisation by absorbing some of the losses in the event of a default.
Super senior debt securities are sometimes referred to as "super senior notes" or "super senior tranches"
Here are some of the applications of super senior debt securities in securitisation:
- To provide credit enhancement: As mentioned above, super senior debt securities can be used to provide additional credit enhancement to a securitisation. This can make the securitisation more attractive to investors and can help to reduce the cost of borrowing for the issuer.
- To attract investors with a low risk appetite: Super senior debt securities typically offer lower yields than other debt securities in a securitisation. This is because they are less risky, as they have a higher priority of payment. Investors who are looking for a low-risk investment may be attracted to super senior debt securities.
- To align the interests of investors and borrowers: Super senior debt securities can help to align the interests of investors and borrowers in a securitisation. This is because super senior debt holders are more likely to suffer losses in the event of a default. This can encourage borrowers to manage their risk more carefully and to make their payments on time.
It is important to note that super senior debt securities are not without risk. In the event of a very large default, super senior debt holders may still suffer losses. However, super senior debt securities are generally considered to be one of the safest types of debt securities in a securitisation.