Subordinated Debt
Candlefocus EditorSubordinated debt ranks lower in priority during bankruptcy proceedings and so creditors holding subordinated debt may not be paid until all of the senior debtors are paid in full. It is listed as the last among long-term liabilities on the balance sheet after unsubordinated debt.
One of the main advantages of subordinated debt is that it comes with lower interest rates as compared to other forms of borrowing. This loan structure allows businesses to access more debt with a less drastic impact on their capital structure. In essence, subordinated debt provides additional funds for companies to use for investment, expansion, or rollout of new products and services.
Subordinated debt typically has a longer-term than unsubordinated debt and is used for larger and more risky investments. Some examples of subordinated debt include convertible bonds, mezzanine debt, second lien loans, subordinated notes, mezzanine notes, and subordinated bridge loans.
Subordinated debt holders may be offered additional benefits such as warrants or rights to participate in future activities of the company. These additional benefits are intended to compensate the subordinated debt holder for the risk they are taking and can be beneficial for both parties.
It is important for investors to keep in mind that subordinated debt is a riskier form of debt and can increase the chance of not getting repaid if the company goes bankrupt. Therefore, investors should be comfortable with taking such risks before investing in subordinated debt.