What is Subordinated Debt?
Subordinated debt (also known as subordinated loan, junior debt, or sub-debt) is a secondary-priority debt that can be legally collected only after other debts have been repaid. The name "subordinate" refers to the lender's secondary status relative to senior debt holders in case of liquidation or bankruptcy.
How It Ranks
In case of liquidation, subordinated debt ranks below:
- The liquidator
- Government tax authorities
- Senior debt holders
Because subordinated debts are only repayable after other debts have been paid, they carry higher risk for the lender — resulting in a higher yield (interest rate) than senior debt.
Common Structures
- Subordinated Bonds: Regularly issued as part of securitization (asset-backed securities, CMOs, CDOs)
- Mezzanine Debt: Positioned "between" senior debt and equity in the capital structure
- Tranches: Often issued in smaller parts of the total, with senior tranches paid first
Used For
Subordinated debt is best for corporations or businesses with proven revenue and history that demonstrates stability, and that have a larger project or higher-cost expansion. It is structured so that the borrower only pays interest (called a "coupon") during the term, and repays principal at the end — typically over 6 months to 10 years.
Payment frequency can be quarterly, bi-annually, or annually — providing flexibility for businesses that need capital now but prefer deferred principal repayment.
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