Series 79 practice questionmediumLeveraged Buyouts
In an LBO capital structure, which layer of financing has the highest priority of repayment in the event of default?
- AMezzanine debt
- BHigh-yield bonds
- CSponsor equity
- DSenior secured bank debt✓ Correct answer
Explanation
Why D — Senior secured bank debt
Senior secured bank debt has the highest priority in the capital structure because it is secured by the company's assets and has first claim in the event of default or liquidation. Below senior secured debt in priority are senior unsecured debt, subordinated/mezzanine debt, and finally equity. This priority structure is reflected in the interest rates charged, with senior secured debt carrying the lowest rate and equity investors requiring the highest expected return to compensate for being last in line.
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