Senior debt: the cheapest money in the deal, sized and placed properly.

Senior debt is borrowing that ranks first for repayment and first over the security given by the borrower. In a leveraged capital structure it sits at the bottom of the stack and the top of the queue: paid before subordinated debt, before mezzanine, before any shareholder loan notes and long before the equity. That priority is why it is the cheapest money in a transaction, and why the first structuring question on any acquisition is how much senior debt the target can genuinely carry.

Seniority is created by contract rather than by scale. A £3 million facility can rank senior and a £30 million facility can rank behind it, because the ranking is written into the facility agreement, the security documents and the intercreditor deed rather than the loan size. UK senior acquisition debt comes mainly from clearing and challenger banks, with specialist cash flow lenders taking the cases banks find too thin on assets. We arrange it; we are not a lender.

Context on the whole stack sits in the leveraged buyout structure guide and on the acquisition finance hub.

Two tests, applied together. The first is leverage: senior debt of an indicative 2.5x to 3.5x EBITDA, measured as net senior debt to adjusted EBITDA, with the lower end for cyclical, contract-dependent or customer-concentrated businesses and the upper end for recurring-revenue models that convert earnings into cash. The second is cover: free cash flow after tax, capital expenditure and working capital movements, divided by scheduled capital and interest, with lenders looking for debt service cover around 1.25x on the base case and still above 1.0x on a downside.

Cash conversion is what separates two businesses with identical EBITDA. As a worked example, a target with £2 million of adjusted EBITDA might support £6 million of senior debt at 3.0x, costing roughly £1.3 million a year in capital and interest over six years at an indicative 8.5%. If only 70% of that EBITDA reaches free cash flow, the same £6 million stops working and the structure needs a longer amortisation profile, a smaller senior tranche or a junior layer above it. Illustrative figures only.

Test your leverage and cover ratios · Leverage ratios explained · What is EBITDA?

Senior lenders buy information and control, not just a return. A UK bank facility typically carries three or four financial covenants tested quarterly on a rolling twelve-month basis: net debt to EBITDA falling year on year, interest cover, debt service or cash flow cover, and often a cap on capital expenditure. Headroom of 20 to 25% against the base-case forecast is the usual negotiation, because covenants set too close to plan turn an ordinary trading wobble into a default.

Around the financial tests sit the undertakings that shape how the group runs: monthly management accounts and annual audited figures, restrictions on further borrowing, disposals, dividends and acquisitions outside agreed baskets, and frequently a cash sweep that pushes surplus cash into early repayment. Sponsor-backed deals negotiate an equity cure, letting the shareholders inject cash to fix a breach a limited number of times. Getting these terms right at heads of terms stage is cheaper than renegotiating them in year two.

Four things: ranking, security, repayment profile and price. Senior debt ranks first, takes first-ranking security, amortises on a schedule and prices at an indicative 7% to 10% all-in. Subordinated debt, which the market also calls junior debt or mezzanine, ranks behind, takes second-ranking security, usually repays as a bullet on exit or refinancing, and costs an indicative 12% to 18% including PIK once payment-in-kind interest is included. Both bands are indicative as of September 2026.

The practical question is not which is better but where the boundary falls. Senior debt is cheap until the cover ratios say stop; after that, every further pound has to come from a junior layer or from equity. Some borrowers avoid the split entirely by taking unitranche debt, a single facility from a debt fund that blends both positions at one blended rate. Others stack mezzanine finance above a bank facility, or use cash flow lending where the balance sheet is asset-light. We model the alternatives side by side before recommending one.