Subordinated debt

Subordinated debt is a debt obligation that has a lower payment priority than more senior debt. Thus, the claims of more senior debt holders must be satisfied before the holders of subordinated debt can be paid. If the borrower does not have the financial resources to pay off its debt holders, the holder of subordinated debt is at a heightened risk of not being paid. Given the higher risk for these investors, subordinated debt usually has a higher effective interest rate than more senior debt, thereby compensating investors for the enhanced possibility of default. This type of debt is usually issued by larger corporations that are considered to be financially secure, with high credit ratings. A smaller organization with problematic cash flows might not be able to issue subordinated debt at all.