Subordinated Debt

Hey Guys, could someone please provide me with some good arguments why a company should issue subordinated debt instead for a normal bond? What are the reasons companies are doin this? Appreciate your help guys, an K**** A** on the level 3 material! Chris

Senior lenders like it

It is about the claim sequence.

Maybe there is a covenant that prohibits more senior debt so that senior debt claims are protected in case of bankruptcy, yet subordinated debt is still cheaper to issue than equity.

Everyone who has ever taken out a home equity loan or second mortgage when they have a first mortgage has issued subordinated debt.

In bad times subordinate debt behaves like equity… so incases of banctrupcy company benefits

that is what I had read in FRM

What about the buyer? Why they would by a subordinated debt instrument?

zidane2 Wrote: ------------------------------------------------------- > In bad times subordinate debt behaves like > equity… so incases of banctrupcy company > benefits Not true - in bad times subordinated debt will bring a company to it’s knees approximately the same way that secured senior debt will. If you can’t pay the coupon, you default and then the shoot hits the fan.

Same reason people (used to) buy subordinate tranches in structured vehicles - yield. As you move down the capital structure risk and return increases, and junior debt is just another stop on your way to equity.

Hiya Turkiya Wrote: ------------------------------------------------------- > What about the buyer? > > Why they would by a subordinated debt instrument? Why would you buy equity? Between senior secured debt and equity lies subordinated debt. It’s got more upside than senior debt and lower probability of downside (and probably less downside) than equity.

Thanks to you both