Subordinated Debt Means Last To Get Paid

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Subordinated debt is like any other debt, borrowed capital, except with one crucial difference. It is debt that gets paid off last if the debtor goes into bankruptcy. For this reason, usually there is a slightly higher interest rate for this type of debt.

Subordinated debt can be issued to avoid bank failure. A bank issues debt, an IOU, that is at least 10 years, and then with the borrowed funds, it pays off debts due in the near future. This is not a ideal situation, but the interest rates tend to be quite attractive. The terms of the loan may also include a clause that allows the bank to pay off the loan in the future after a certain number of months or years, allowing the bank to seek out lower interest rate subordinated debt or other ways of building capital reserves.

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