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What is subordinated debt?

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Subordinated debt is all debt that ranks after asset-based financing, senior secured term loans and unsubordinated debt but ahead of equity investments.  Whereas in Europe subordinated debt is any secured or unsecured debt that ranks behind senior debt but ahead of equity, US subordinated debt is unsecured debt whose claims rank after those of all secured creditors and the general creditors.

Debt Subordination (Example)
This illustrates the structural subordination of mezzanine debt in the corporate structure of a company group.

Source:

This illustrates the structural subordination of mezzanine debt in the corporate structure of a company group.

Unsubordinated debt is indebtedness that ranks ahead of other unsecured debt with regard to claims on assets and earnings in a liquidation, except for obligations mandatorily preferred by the operation of law (e.g., taxes and wages).  Before making a loan, lenders will want to know of any creditors whose claims legally rank senior to the intended loan of the lenders.  The pari passu representation and the negative-pledge clause are specifically required for the protection of unsecured and unsubordinated creditors.  Unsubordinated debt has general creditor status.

Debt subordination can be structural and/or contractual.  The successful syndication of leveraged finance quite often depends on the how the different layers of finance are structurally and contractually subordinated.

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