Can someone please gives me its understanding of the concept of STRUCTURAL SUBORDINATION in the fixed income material. I am not sure if this process of upstreaming dividends to parent is ok, or if the subsidiaries must service its own debt service before upstreaming to parent. Thanks
Structural surbordination:
You lend to a parent whose assets are shares in a subsidiary.
There are lenders at the subsidiary level.
If all goes belly up, all lenders at the subsidiary level get paid before the remainder flows upstream to the parent. Hence, even if you as a lender to the parent are secured by a debenture or guarantee, you are stil structurally subordinated to the lenders at the subsidary level. Even the unsecured creditors get paid before you do in a insolvency scenario.