The capital structure and why seniority matters

The capital structure is the stack of claims on a business or an asset: secured debt, unsecured debt, mezzanine, preferred equity and common equity. The order in which those claims are paid, and the assets each claim can look to, determines who is repaid in full and who absorbs a loss if value falls.

We focus on the top of the capital structure: first-lien, senior secured positions. We consider mezzanine only selectively, with strong control rights. This entry explains why.

The stack, from top to bottom

Return expectations are described qualitatively because they vary with the market, the asset and the borrower. The direction never changes: the lower the position, the more it must be paid to compensate for the losses it absorbs first.

Lien priority and payment priority

Seniority has two distinct components, and documents treat them separately.

• Lien priority concerns collateral. A first-lien lender has the first claim on the proceeds of specific assets. A second-lien lender shares the same collateral but is paid only after the first lien is satisfied.
• Payment priority concerns cash. A subordinated lender agrees not to be paid, or not to be paid in certain circumstances, until senior debt is repaid, whether or not it has collateral.

The relationship between lenders is set out in an intercreditor or subordination agreement, which also governs who controls enforcement. See Intercreditor agreements.

Unitranche

A unitranche loan combines what would otherwise be a first-lien and a second-lien loan into a single facility, under one set of documents, at a single blended rate. It is common in sponsor-backed middle-market lending because it is simpler and faster to execute than two separate loans.

Where a unitranche is held by more than one lender, those lenders may split it into “first-out” and “last-out” pieces under an agreement among lenders. The borrower sees one loan; the lenders allocate payments and enforcement rights among themselves. We cover unitranche structures in more detail in Senior secured term loans, unitranche and special situations.

Mezzanine and preferred equity

Mezzanine debt sits below senior debt and above equity. In commercial real estate, it is typically a loan to the owner of the property-owning entity, secured by a pledge of the equity in that entity rather than by a mortgage on the property. If the borrower defaults, the mezzanine lender’s main remedy is to foreclose on the pledged equity under Article 9 of the Uniform Commercial Code and step into ownership, subject to the senior loan.

Preferred equity achieves a similar economic position through the operating agreement rather than a loan, with the investor’s protections coming from priority distributions and control rights that can be triggered on defined events.

We consider mezzanine only selectively, with strong control rights—cure rights, purchase options and consent over major decisions—that let us protect our capital as effectively as a senior lender would. Our case study Project Harborlight shows what that looks like in practice.

An illustrative loss waterfall

The arithmetic below is illustrative and simplified. It ignores interest, fees and enforcement costs, which in practice reduce recoveries further.

Assume a property bought for $100M, financed with a $60M first-lien loan, a $15M mezzanine loan and $25M of equity. The plan fails and the property is sold.

The property has to lose 40% of its value before the first-lien lender loses anything; the mezzanine lender starts losing after a 25% decline. That gap is what seniority buys. It is also why loan-to-value is the single most important number in a secured loan: it measures how far value can fall before the lender is impaired. See Leverage: loan-to-value, loan-to-cost and debt multiples.

Structural subordination

Seniority is not only about documents; it is also about which entity owes the debt. A lender to a holding company is structurally subordinated to creditors of the operating subsidiaries, because the subsidiaries’ assets must satisfy their own creditors before any value reaches the holding company. Senior lenders address this with guarantees from subsidiaries and liens on their assets, and with limits on debt incurred below them. See Collateral, security and guarantees.

Why we focus on the top of the stack

Seniority is the first line of defense, and we treat it that way. A first-lien, senior secured loan gives us the first claim on the collateral and the strongest hand if a plan goes wrong. It also gives us the most say in what happens next, which matters as much as the claim itself.

That focus has costs. Senior loans earn less than junior capital, and we turn away requests that need a lender to stretch below the senior position. We accept those costs because private credit is the income engine of Caldrion’s portfolio, and an income engine that occasionally loses capital is not doing its job. Our published leverage limits—up to 75% loan-to-cost and up to 65% loan-to-value—describe how much equity we want beneath us. Our criteria set out the rest.

Questions for a borrower designing a capital structure

• How much senior debt can the collateral and cash flow support on conservative assumptions?
• Is junior capital needed at all, or would more equity make the senior loan cheaper and the whole structure safer?
• If there is junior capital, what rights will it have against the senior lender, and are they compatible?
• Which entity borrows, which entities guarantee and where does the collateral sit?

If you are working through those questions on a specific deal, our loan types overview and what to send are good next steps.

This entry is general information as of November 2026, not investment, legal or tax advice, and not an offer of securities.