Senior loans, like airport lounges, are losing their elite status
First-lien is not so special any more due to changes in leveraged finance markets
Airport lounges were once exclusive enclaves that allowed customers to avoid the chaos occurring just a few metres away. Today, lounges are not so picky about whom they let in, or in what numbers. The experience has suffered accordingly.
The financial equivalent of an airport lounge is “first-lien” senior debt. This is a claim advertised as safe because it ranks above others in the credit pecking order, secured against assets such as property or equipment. Like the Delta Sky Club, it keeps the beneficiary apart from the general mayhem, in this case that of being a junk bondholder or private equity sponsor.
In 2026, first-lien is not so special any more, due to several changes in leveraged finance markets. First, capital structures associated with leveraged buyouts of companies, which typically had senior loans at the top cushioned by junior junk bonds underneath, are less common. Loan-only “unitranche” structures have become more prevalent.
As such, losses are increasingly soaked up by senior debt tranches. Moody’s data shows that the proportion of junior debt in leveraged capital structures slid from 33 per cent two decades ago to just 9 per cent by 2024.
Then there is the troubling phenomenon of “creditor-on-creditor violence” — equivalent to stressed passengers throwing down at the airport gate. A troubled company pits rival senior creditors against each other to see who offers better terms on a rescue financing, taking advantage of loan contracts that lack covenants. The winner gets their first-lien debt upgraded into a rarefied “super senior” layer. The loser is thrown into steerage.
First-lien’s loss of status shows up in two important numbers. First, recovery rates for that kind of debt, according to Moody’s, have fallen almost 20 cents from their historical average of 75 cents per dollar loaned. The standard deviation for returns — indicating how far they spread from the mean in either direction — is about 30 per cent, meaning there can be almost catastrophic losses in some cases.
Because first-lien loans have been marketed as relatively safe, they are also only moderately lucrative. But their high single-digit returns and protection from interest rates going up made them attractive to insurers, pensioners and those who lack the stomach for swashbuckling junk bonds. If the credit cycle is turning, those investors may be surprised to discover how many others have a claim on their free snacks and comfortable chairs.