Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Junior Issue

What it is:

A junior issue is an issuance of securities that are subordinate to other securities issued by a company. Junior issues can be debt or equity.

How it works (Example):

For example, if Company XYZ issues preferred stock, those shares are senior to Company XYZ's common stock shareholders. This means that should Company XYZ go bankrupt, the preferred shareholders are entitled to repayment before the common shareholders are. The common stock is therefore the junior issue.

In another example, if Company XYZ issues bonds, the bondholders are creditors who are senior to Company XYZ's shareholders. This means that should Company XYZ go bankrupt, the bondholders are entitled to repayment before the shareholders are. Let’s say Company XYZ needs more capital now, and it borrows money from Bank ABC. Who gets paid first? The bondholders or Company XYZ? It depends on what Company XYZ negotiates with Bank ABC, but it is likely that Bank ABC is now holding junior debt, meaning that if Company XYZ goes belly up, the bondholders get paid first, then Bank ABC, then the shareholders (if there’s anything left).

Why it Matters:

Owners of senior securities get their hands on leftover cash before others in the event of bankruptcy. Accordingly, owners of securities from a junior issue (those further down in the pecking order) are more likely to get stiffed. That is, the more subordinate an owner or issuer is, the weaker its claim on the company's assets. This is why the more junior an issue is, the higher the return investors demand.