This paper examines how lending relationships affect firms' incentives to default, using loan-level data from Spain. The study finds that firms prioritize repaying loans from their most important banks to preserve valuable lending relationships. Banks also integrate this borrower behavior into their credit risk management, with the most important banks recognizing lower discretionary loan impairments. The results are robust to alternative difference-in-difference (DID) analyses and control for potential bank forbearance, loan characteristics, and various time-varying bank and firm fixed effects. The findings suggest that loans from the most important banks have a "shadow seniority" relative to similar loans from other banks, highlighting the importance of considering lending relationships in credit risk models. The study also examines the impact of bank solvency and the acquisition of Banco Santander by Banco Popular, finding that borrowers prioritize repayment to the main bank after an acquisition. Additionally, the paper analyzes the effect of bank solvency on loan delinquency and confirms that banks internalize borrower incentives to repay debt.This paper examines how lending relationships affect firms' incentives to default, using loan-level data from Spain. The study finds that firms prioritize repaying loans from their most important banks to preserve valuable lending relationships. Banks also integrate this borrower behavior into their credit risk management, with the most important banks recognizing lower discretionary loan impairments. The results are robust to alternative difference-in-difference (DID) analyses and control for potential bank forbearance, loan characteristics, and various time-varying bank and firm fixed effects. The findings suggest that loans from the most important banks have a "shadow seniority" relative to similar loans from other banks, highlighting the importance of considering lending relationships in credit risk models. The study also examines the impact of bank solvency and the acquisition of Banco Santander by Banco Popular, finding that borrowers prioritize repayment to the main bank after an acquisition. Additionally, the paper analyzes the effect of bank solvency on loan delinquency and confirms that banks internalize borrower incentives to repay debt.