Subordinated Debt

Key Highlights

• Subordinated debt, sometimes called junior debt or subordinated loans, is a type of loan or bond that gets paid back after other debts if a company goes bankrupt or shuts down.

• If the company runs out of money, senior debt holders get paid first, and subordinated debt holders only get paid after them, but before shareholders.

What is Subordinated Debt?

Subordinated debt, sometimes called junior debt or subordinated loans, is a type of loan or bond that gets paid back after other debts if a company goes bankrupt or shuts down. If the company runs out of money, senior debt holders get paid first, and subordinated debt holders only get paid after them, but before shareholders.

Key Features

• Repayment Priority: If a company fails, subordinated debt holders wait behind senior debt holders to get their money back.

• Unsecured Nature: It is typically unsecured, meaning there is no specific collateral backing the debt.

• Risk and Return: Because it’s riskier, it often pays higher interest rates to attract investors.

• Position in Capital Structure: On a balance sheet, subordinated debt is listed after senior debt but before equity, placing it in the middle of the capital stack.

• Examples: Common forms include mezzanine debt, certain types of bonds, and some tranches of asset-backed securities

Why it Matters?

• For Companies: It’s a way to borrow money without giving up ownership (like issuing new stock). Big companies or banks might use it to raise cash or meet financial rules.

• For Investors: It can offer better returns than safer investments, but there’s a bigger chance of losing money if the company goes under.