What is a Subordinated Debt?

A subordinated debt or subordinated loan is a loan or security which is prioritized lower than other loans or securities on the occasions of bankruptcy or liquidation. That means, if the borrower defaults or is insolvent, the subordinated debt holders will be paid after senior debt holders are repaid fully. This is also known as junior security or junior debt.

How Does Subordinated Debt Work?

Subordinated debts can both be secured or unsecured. It is riskier than other debts as on an occasion of liquidation, the subordinated debt holder is paid last. That is, they are paid after the full repayment of all other corporate debts and loans.

When a company files for its bankruptcy the court directs the company to prioritize all debt repayments. The unsubordinated debt holders/bondholders are paid first. After fully satisfying their debts, if there are still assets left, the subordinated debt holders are paid.

The subordinated bondholders may be paid partially or fully depending on the amount of assets left. The subordinated debt holders are paid just before the equity holders.