Subordinated debt

Let's begin by situating subordinated debt within the broader context of a company's capital structure. Subordinated debt, sometimes referred to as junior debt, is a class of debt that ranks below senior debt in terms of claims on assets and earnings. In the event of a default or liquidation, subordinated debt holders are only repaid after senior creditors have been satisfied. This makes subordinated debt riskier than senior debt but less risky than equity from the perspective of priority in repayment. Because of this subordinated position, lenders of such debt typically require a higher rate of return to compensate for the increased risk. Subordinated debt sits in the middle of a company's capital stack. At the top are senior secured creditors whose claims are backed by assets. Unsecured senior creditors come next, followed by subordinated debt holders. Below subordinated debt are preferred shareholders than ordinary equity holders. In the United Kingdom, subordinated loan or junior debt are often used interchangeably. While in the United States of America, the senior versus subordinated bond distinction is emphasized. In bankruptcy, subordinated debt holders recover only after senior obligations are met, usually receiving less than higher-ranking creditors. Subordinated debt exhibits several important features. It is usually unsecured, meaning it doesn't have collateral backing, which adds to its risk profile. Because these lenders face higher risks, interest rates are typically higher than for senior debt.