Subordinated Debt

Glossary

Banking

Subordinated Debt

Companies that issue debt divide their debt into senior and subordinated debt. This is known as their capital structure. In the event of insolvency, creditors are repaid strictly in order of priority. Senior secured claims are paid off first followed by senior unsecured claims. Subordinated claims are paid off from any proceeds left over. In return for their lowly position in the repayment hierarchy, subordinated creditors are paid a higher return in return for the higher risk. Subordinated debt can also be split into several layers from senior subordinated to junior subordinated layers. Only common equity sits below the most junior form of subordinated debt in insolvency.

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