Secured creditor is a lender who legally enforceable claim on a borrower's assets. Lender usually claims assets of liquidation value equal to the loan amount. Secured creditor receive the proceeds of the foreclosure sale and in case of bankruptcy. He has to be satisfied before unsecured creditors. Hierarchy of creditors in case of company insolvency puts secured creditor on the top. Usually it is a bank or other asset lender that holds charge over the asset. Unsecured creditors include: suppliers, contractors, etc.
Secured creditors can be different entities. This type of secured loans can be emitted for consumer and for business. Secured loans can have various types of collateral.There are exist also structured secured credits commonly pack in the form of syndicated loans. Secured loans are also very profitable for financial institutions, because loans are secure by the collateral.It is worth to say that this type of products usually have a insurance. Loans have differently level of collateral.
Secured creditor also has full control over the company's assets. In this situation, the number of members who are involved in the insurance may be significant for monitoring the company's assets. For companies with low credit rate more profitable is borrowing from one sceured creditor (Bolton and Scharfstein, 1996). Secured creditors' control can help also solve action problems in bankruptcy (Picker, 1992).
Type of collateral loans
- Corporate bonds – this type of product is structured and emitted by underwriter behalf of a company.
- Institutional secured loans – this is type of loan for companies, it can be secured by real estate or equipment.
- Secured Personal Loans - this type of loan are usually secured by real estate or jewelery. It is attractive on the market because have low interest.
Secured creditor and company bankruptcy
Secured creditors can be sure that they will be repaid if the borrower becomes insolvent. If the company will be liquidation, collateral can only be used only to repay secured creditors. Secured collateral would not be available to repay unsecured senior loans. Secured creditors have also right to profits from the sale of the company's assets.When a company goes bankrupt, the secure creditor wants to recover his funds as soon as possible. It means that company shares and properties which belong to them are sold at a lower price. However the company's debt is often controle by debtor's management.The company's profits can accumulate during company's bankruptcy conducting so debtor management and the trustee want to recovers money.
- Armour, J., Hsu, A., Walters, A. (2006).The Costs and Benefits of Secured Creditor Control in Bankruptcy: Evidence from the UK. Review of Law & Economics, Volume 8, Issue 1, Pages 101–135.
- Citron, D., Wright, M., Ball, R., & Rippington, F. (2003).Secured creditor recovery rates from management buyouts in distress. European Financial Management, 9(2), 141-161.
- Raphael, J. D., (1961).The Status of the Unsecured Creditor in the Modern Law of secured transaction” Boston College Law Review, 2(2), 303-318.
- Rogers, R. (1980) .Assignement of Rents Clauses under California Law and in Bankrutpcy:Strategy of the Secured Creditor” Hastings Law Journal, 31(6), 1433-1467.
Author: Joanna Kruk