What are Senior Notes in the UK?

As a company, you may consider financing your businesses operations and growth in a number of different ways. One method of doing this is to issue notes. Notes are a type of legal document between a borrower (the note’s issuer) and an investor. These work in a similar way to bonds. There are different types of notes, including promissory notes and convertible notes. The type of note issued will influence the rights of the noteholder and the position of the note issuer. Another common type is ‘senior notes’.

This article will elaborate on what senior notes are, and the general corporate purposes for which different types of notes are issued. 

What is a Note?

A note is a legal document between a borrower and an investor. The borrower in this situation is the organisation that issues the note. That is, your company is a borrower if you issue a note to an investor. You can issue notes to different types of investors. 

Like bonds, notes are a type of debt security that obliges repayment of a loan at a set interest rate within a specified time period. Debt securities are simply debt instruments that can be bought and sold between different parties. These contain key defined terms such as interest rates and renewal dates. Examples of debt securities include government bonds, corporate bonds, and preferred shares. 

Notes vs Bonds

The primary distinguishing feature between a note and a bond is usually the interest rate amount and the maturity date. For example, a note will usually have a lower interest rate and an earlier maturity date than a bond. Notes are sometimes referred to by the features that they have. 

For example, an ‘unsecured note’ is a note that is not backed up with collateral. This means that if the issuer becomes insolvent, the noteholder will receive very little or no compensation. Unsecured notes are therefore much riskier investments than secured notes.

A convertible note, on the other hand, is a type of note where the noteholder is able to convert their notes into equity shares in the company. This may occur if they choose to buy further shares at a later point. Convertible notes are typically used by angel investors who buy in to the company at an early stage and do not want to put a market price on the company’s shares.

What is a Senior Note?

Like the aforementioned notes, a senior note has certain distinguishing features. Above all, senior notes have priority over other notes to receive proceeds in a sale of a company’s assets. This is useful in the event that the company becomes insolvent or goes into liquidation. As a result, senior notes are less risky than other types of investment and therefore usually offer lower returns to investors. 

Like other notes, senior notes may be secured or unsecured debt. This means that they may or may not be backed up by collateral. If they are, then the investor is likely to receive most or all of their investment in the business if it goes into liquidation. However, if the notes are unsecured, the noteholder may not receive the principal and interest in their investment in full.

Convertible Senior Notes

You may structure a senior note as a convertible senior note. This is where you can convert notes into a certain number of common shares. This will mean that the investor then owns equity in your company as opposed to debt. 

Whether an investor owns debt or equity is relevant, because it will also influence the way in which individuals receive payment in the event of insolvency. 

The order in which debtors receive payment is: 

• secured debt holders; 
• unsecured debt holders; 
• preferred shareholders; then
• common shareholders. 

As a result, if a holder of convertible senior notes chooses to convert their notes into common shares, they will drop in the priority of payment if the company becomes insolvent – making their investment riskier. 

In general, it is usually a good idea to issue different kinds of debt and equity to different investors to cater for their risk and investment strategy. This will help you maximise the amount of funding you can secure from investors more generally.

Key Takeaways

As a company looking to raise funds for operations and growth, you may wish to consider issuing senior notes. Senior notes are a type of debt security that gives priority to the holder over others in the event that your company becomes insolvent. 

Because it is a less risky investment, issuing senior notes can help you attract investors with risk-averse investment strategies, thereby helping your company raise more funds. 

If you have any further questions about senior notes, our experienced corporate lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.

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