Subordinated Debt
Short definition
Subordinated debt is the layer recovered after senior creditors in default. It carries a higher coupon, weaker collateral and higher LGD.
Detailed explanation
The intercreditor writes payment waterfalls and collateral sharing. Standstill and payment blocks force cash into PIK.
Covenants freeze junior payments on a senior breach. WACC and net debt count it as debt; ratings sometimes take a slice as equity-like.
Why it matters for the CFO
When senior capacity is full, junior fills a growth or acquisition gap. In a crisis it is the first layer wiped.
How to read it
The junior spread is the price of the LGD gap. Unsecured junior approaches mezzanine.
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Definitions are educational. They are not investment, credit or tax advice.