Seniority and payment priority: senior, mezzanine, junior, equity

Seniority is the order in which capital gets paid back when a company, a fund, or a deal generates cash. Senior debt gets paid first. Mezzanine debt sits in the middle, paid after senior but before junior and equity.

Junior debt comes after that. Equity is last. The same order runs in reverse for losses, which cascade up the stack and wipe out equity before any debtholder takes a dollar of damage.

This stack is sometimes called the capital structure. The position a piece of capital holds in the stack determines what it earns, what it risks, and how it gets paid out.

How payment priority works

Every operating business and every credit deal has a queue. Cash from operations, recoveries from a default, proceeds from a sale: it all enters the queue and gets distributed in priority order, top to bottom. Higher-priority claims fill before lower ones see a dollar.

Take a simple example. A real estate developer raises $130M to build a hotel. The capital comes from four tiers: $80M of senior debt from a bank, $20M of mezzanine debt from a credit fund, $10M of subordinated notes from family offices, and $20M of equity from the sponsor.

The hotel opens and underperforms. Eventually it sells for $90M.

Senior takes the first $80M, exactly the amount it lent. Mezzanine takes the next $10M, half of what it was owed.

Junior gets nothing. Equity doesn't either. That's how the waterfall plays out in plain numbers.

The order runs both directions. In good times, cash flowing in fills senior's coupon first, then mezzanine's, then junior's, and what's left passes through to equity as profit. In bad times, losses run up the same ladder in reverse, hitting equity first and senior only when the lower tiers have been wiped out.

Priority is written into the legal stack of every deal. Loan documents contain intercreditor agreements, subordination clauses, and registered security interests that determine who has the first claim on what asset. When a deal hits a covenant breach or a workout, those documents are what get litigated, and the order they specify is what decides who takes the loss.

Why the tier you sit in determines the price

Each tier is priced for the risk below.

Senior debt earns the lowest rate, because it sits at the safest spot in the stack. If anything goes wrong, the layers of capital below it take the hit before senior is touched.

Lenders accept that lower rate because the loss probability is genuinely low. That's where bank loans and investment-grade bonds live.

Mezzanine sits between debt and equity. It's contractually debt and pays a fixed coupon, but it sits below senior in the queue, which means the coupon is meaningfully higher to compensate for the thinner protection layer between mezzanine and a loss event. The math is simple: thinner cushion, higher coupon.

Warrants and equity kickers are common, which is how mezzanine lenders capture some of the upside they're effectively underwriting.

Junior or subordinated debt has the same shape as mezzanine but sits one notch lower in the queue, which means the loss layer between it and a complete writedown is even thinner, and the rate it earns is higher to match.

Higher rate. Less protection. Smaller market, because most institutional capital won't go this deep.

At the bottom sits equity, which is the cheapest capital to issue (no fixed coupon, no maturity, no covenant package) and the most expensive to compensate, because the equity holder takes the residual after every debt tier has been paid and gets nothing if anything goes wrong.

The pattern across the stack is consistent. Higher up: lower yield, lower risk, narrower outcomes. Lower down: higher yield, higher risk, wider outcomes.

Where this shows up in institutional crypto-backed lending

In tokenized real-world asset structures and crypto-collateral lending pools, the same hierarchy shows up. A pool typically issues a senior tranche to institutional LPs and holds a junior tranche internally, which absorbs the first dollar of loss on the underlying credit and lets the senior tranche offer a more stable return profile. The actual distribution has more layers.

For how that mechanism works in detail, including the order of cash flow across reserve buffers, hedge tiers, and the senior tranche, see Waterfall distribution: how credit portfolios pay returns across priority tiers.