Subordinated Debt

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Definition of 'Subordinated Debt'

Subordinated debt is a type of debt that ranks below other types of debt in terms of repayment priority. This means that in the event of a bankruptcy, subordinated debt holders would be paid after senior debt holders, such as bondholders and secured creditors. Subordinated debt is often issued by companies with a high level of debt or by companies that are in a cyclical industry.

There are two main types of subordinated debt: senior subordinated debt and junior subordinated debt. Senior subordinated debt ranks below senior debt but above junior subordinated debt. Junior subordinated debt ranks below all other types of debt.

Subordinated debt can be issued in a variety of forms, including bonds, notes, and loans. The interest rate on subordinated debt is typically higher than the interest rate on senior debt, because subordinated debt holders assume a greater risk of default.

Subordinated debt can be a useful tool for companies that need to raise capital but do not want to issue senior debt. Subordinated debt can also be used to finance mergers and acquisitions.

There are a number of risks associated with subordinated debt. The most significant risk is that subordinated debt holders may not be repaid in full in the event of a bankruptcy. Subordinated debt holders also have less protection from creditors than senior debt holders.

Despite the risks, subordinated debt can be a valuable tool for companies that need to raise capital. Subordinated debt can provide a company with a lower interest rate than senior debt, and it can also be used to finance mergers and acquisitions. However, companies should carefully consider the risks associated with subordinated debt before issuing it.

In addition to the risks mentioned above, there are a number of other factors that companies should consider before issuing subordinated debt. These factors include:

* The company's financial health
* The company's business prospects
* The level of competition in the industry
* The interest rate environment
* The tax implications of issuing subordinated debt

Companies that are considering issuing subordinated debt should consult with their financial advisors to assess the risks and benefits of this type of debt.

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