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Understanding Subordinated Debt and the Risks

 

When faced with the risk of making subordinate loans make sure you understand all the options.

Generally speaking, subordinated debt is indebtedness of a creditor with respect to which such creditor’s rights are subject to another creditor’s rights. And in practice, there are many financial scenarios encompassed within the term “subordinated debt.” It’s important for the creditor (whether senior or subordinated) to know the capital structure of the borrower and the other loan parties in order to assess the risk of whether any other creditor or third party has any right that would prime the rights of the proposed creditor.