Unsecured Note
An unsecured note is a loan that is not secured by the issuer's assets. **AAA:** Companies of exceptionally high quality (reliable, with consistent cash flows) **AA:** Still high quality; slightly more risk than AAA **A:** Low default risk; somewhat more vulnerable to business or economic factors **BBB:** Low expectation of default; business or economic factors could adversely affect the company **BB:** Elevated vulnerability to default risk, more susceptible to adverse shifts in business or economic conditions; still financially flexibility **B:** Degrading financial situation; highly speculative **CCC:** Real possibility of default **CC:** Default is probably **C:** Default or default-like process has begun **RD:** Issuer has defaulted on a payment **D:** Defaulted Unsecured debt holders are second to secured debt holders in the event of needing to claim assets in the wake of a company's liquidation. Because unsecured debt isn't backed by collateral and is a higher risk, the interest rates offered are higher than secured debt backed by collateral. The most senior claims belong to secured creditors, followed by unsecured creditors, including bondholders, the government (if the company owes taxes), and employees (if the company owes them unpaid wages or other obligations). For example, in the case of Fitch, this agency will offer a letter-based credit rating that reflects the chances that the issuer will default, based on internal (i.e., the stability of cash flows) and external (market-based) factors.
What Is an Unsecured Note?
An unsecured note is a loan that is not secured by the issuer's assets. Unsecured notes are similar to debentures but offer a higher rate of return. Unsecured notes provide less security than a debenture. Such notes are also often uninsured and subordinated. The note is structured for a fixed period.
Understanding Unsecured Note
Companies sell unsecured notes through private offerings to generate money for corporate initiatives such as share repurchases and acquisitions. An unsecured note is not backed by any collateral and thus presents more risk to lenders. Due to the higher risk involved, these notes' interest rates are higher than with secured notes.
In contrast, a secured note is a loan backed by the borrower's assets, such as a mortgage or auto loan. If the borrower defaults, these assets will go towards the repayment of the note. For this reason, collateral assets must be worth at least as much as the note. Additional examples of collateral that can be pledged include stocks, bonds, jewelry, and artwork.
Unsecured Note and Credit Rating
Credit rating agencies will often rate debt issuers. For example, in the case of Fitch, this agency will offer a letter-based credit rating that reflects the chances that the issuer will default, based on internal (i.e., the stability of cash flows) and external (market-based) factors.
Investment Grade
Non-Investment Grade
Unsecured debt holders are second to secured debt holders in the event of needing to claim assets in the wake of a company's liquidation.
Special Considerations
The most senior claims belong to secured creditors, followed by unsecured creditors, including bondholders, the government (if the company owes taxes), and employees (if the company owes them unpaid wages or other obligations). Finally, shareholders receive any remaining assets, beginning with those holding preferred stock followed by holders of common stock.
Related terms:
Acquisition
An acquisition is a corporate action in which one company purchases most or all of another company's shares to gain control of that company. read more
Capital Note
A capital note is short-term unsecured debt issued by a company to pay short-term liabilities. Capital notes have low priority and carry more risk than other types of secured corporate debt. read more
Collateralized Debt Obligation (CDO)
A collateralized debt obligation (CDO) is a complex financial product backed by a pool of loans and other assets and sold to institutional investors. read more
Collateralized Loan Obligation (CLO)
Collateralized loan obligations (CLO) are securities backed by a pool of debt, usually loans to corporations with low credit ratings or private equity firms. read more
Credit Rating
A credit rating is an assessment of the creditworthiness of a borrower—in general terms or with respect to a particular debt or financial obligation. read more
Debenture
A debenture is a type of debt issued by governments and corporations that lacks collateral and is therefore dependent on the creditworthiness and reputation of the issuer. read more
Fitch Ratings
Fitch is an international credit rating agency based out of New York City and London that is often used as an investment guide to stocks promising a solid return. read more
Liquidation
Liquidation is the process of bringing a business to an end and distributing its assets to claimants, which occurs when a company becomes insolvent. read more
Rate of Return (RoR)
A rate of return is the gain or loss of an investment over a specified period of time, expressed as a percentage of the investment’s cost. read more
Secured Note
A secured note is backed by the borrower's assets. Default on a secured note can trigger sale of assets pledged as collateral. read more