Definition of 'Subordination Agreement'
The subordination agreement specifies the order in which the creditors will be repaid in the event of a default. The senior creditor will be repaid first, followed by the junior creditor. This means that if the debtor defaults, the senior creditor will receive all of their money before the junior creditor receives anything.
Subordination agreements are often used in corporate finance transactions, such as mergers and acquisitions. In these transactions, the senior creditor is typically the lender that provides the debt financing for the transaction. The junior creditor is typically the equity investor that provides the equity financing for the transaction.
The subordination agreement ensures that the lender is repaid first in the event of a default. This is important because the lender is taking on the most risk in the transaction. The equity investor is taking on less risk, so they are willing to accept a lower priority in the repayment of their debt.
Subordination agreements can also be used in other types of transactions, such as asset sales and joint ventures. In these transactions, the senior creditor is typically the party that is providing the most value to the transaction. The junior creditor is typically the party that is taking on the most risk.
Subordination agreements are important because they help to protect the senior creditor in the event of a default. By ensuring that the senior creditor is repaid first, the subordination agreement helps to reduce the risk of the senior creditor's investment.
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