Debt is typically split across which tranches?

The classification of debt into senior debt and subordinated debt is key in understanding the priority of claims in capital structures. Senior debt is considered to have the highest priority in terms of repayment in the event of liquidation or bankruptcy. This means that in a default scenario, holders of senior debt are paid first before any other creditors or equity holders.

Subordinated debt, on the other hand, has a lower priority compared to senior debt. It is riskier for investors since it is repaid only after the senior debts have been satisfied. In exchange for this additional risk, subordinated debt often comes with higher interest rates compared to senior debt.

This distinction is crucial in financial modeling and when analyzing a company's capital structure, as it influences the risk profile, potential returns for investors, and the overall valuation of the company. Investors often look closely at this split to assess their exposure to risk and to make informed investment decisions.