Debt tranches and seniority
By SuperdayReps · Wharton MBA · ex-Greenhill · investment banking interview coaching
6 min read · updated July 2, 2026
Every dollar that funds a buyout has a rank. That ranking, top to bottom, is the whole story of an LBO's financing, and it decides two things that matter: what each layer costs, and who gets their money back when the company can't pay everyone.
Start with the intuition. A lender who is first in line to get repaid and has a claim on the company's assets will accept a low rate. A lender who sits behind them, with no collateral and a promise to be paid only after the senior guys are made whole, demands a lot more. And the owner, the equity, gets whatever is left after every lender is satisfied. That's the entire logic of the capital structure: more risk sits lower in the stack, and lower means more expensive.
The stack, top to bottom
Here is the order you need cold. The top is safest and cheapest. The bottom is riskiest and most expensive.
| Layer | Secured? | Rough cost | Repaid |
|---|---|---|---|
| Revolver | Yes (1st lien) | Lowest | First |
| Senior secured term loans (TLA / TLB) | Yes (1st lien) | Low | First |
| Senior unsecured / high yield | No | Medium | After secured |
| Subordinated / mezzanine | No, contractually junior | High | Near-last |
| Equity | n/a | Highest required return | Last |
The revolver is a credit line the company draws on and repays as it needs working capital, like a corporate credit card. It's usually undrawn at close and priced cheaply because it's first-lien secured.
Senior secured term loans are the workhorse of most LBOs. TLA typically amortizes (pays down principal on a schedule) and is often held by banks. TLB amortizes very little, runs longer, and gets sold to institutional investors. Both are secured by the company's assets, so they carry a low rate and sit at the top.
Below the secured debt sits high yield (senior unsecured bonds). No collateral, longer maturity, fewer restrictions on the borrower, and a higher coupon to compensate. Then mezzanine debt, the most expensive layer of debt, which is contractually subordinated and sometimes carries warrants or a PIK feature so the lender shares in the upside.
At the very bottom is the equity the sponsor (the PE firm) writes. Highest risk, highest required return, paid last. If you want the full picture of how these pieces come together at close, see the LBO and paper LBO.
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Frequently asked
- What are the debt tranches in an LBO, from top to bottom?
- From top to bottom: the revolver, senior secured term loans (TLA and TLB), senior unsecured or high yield, subordinated or mezzanine, then equity at the very bottom. Cost rises and repayment priority falls as you go down. First-lien senior secured debt is the cheapest money in the deal; equity is the most expensive and paid last.
- Why does the cost of a debt tranche rise as you go down the stack?
- Price tracks the odds of getting repaid and how much you recover if things break. Secured senior debt has a lien on real assets and gets repaid first, so its expected loss is small and its rate is low. Unsecured and subordinated lenders have weaker claims and thinner recovery, so they charge a fatter coupon.
- What is the fulcrum security?
- The fulcrum security is the tranche where the money runs out in a default, the layer that is only partially repaid. Everything senior to it gets paid in full, and everything junior gets little or nothing. It typically converts into the new equity of the reorganized company, which is why distressed investors hunt for it.
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