What is Subordinated Debt?

Subordinated Debt is a junior security which will be serviced after the Unsubordinated Debt in the event of a company bankruptcy.

Subordinated Debt has been deemed less important than the Unsubordinated Debt that a company has taken on, in terms of what priority it will have for payment in the event of company default. The amount of money and length of term on the loan are considerations when making this distinction.

What priority a bond has in the event of insolvency can be an important consideration for an investor pursuing high yield bonds. Generally the highest yielding bonds are at the highest risk of default, and sometimes they live up to their unfortunate moniker of “junk bonds.”

When collateralized debt obligations are divided into tranches, the unsubordinated debt will be in the A tranche, while the B and C tranches will contain the subordinated debt.