What is Subordinated Debt?
Subordinated Debt typically takes the form of notes which pay regular interest but are subordinated, or junior, to a senior lender in the event of a default. Typically, the senior lender, usually a bank, has the right to freeze interest payments due on any subordinated debt in the event the issuing company experiences difficulty making payments on its debt. Additionally, subordinated debt typically is paid back only after the senior debt is paid in full. As a result, subordinated debt is viewed as being more risky than senior debt or bank debt, and usually carries a significant return premium including equity participation in the form of warrants or conversion rights. Because these notes are fully subordinated to senior debt, banks generally view these securities as a form of equity and not debt.
