Subordination

The ranking of claims so that some lenders are repaid only after others have been paid in full.

Example

Senior lenders owed 6,000,000 are paid first from a 7,000,000 sale; junior lenders owed 3,000,000 receive the remaining 1,000,000.

Important

A junior position can lose most of its value even when senior lenders are repaid in full.

Related terms

• Seniority — Where a particular claim sits in the queue for payment if the borrower fails. Secured claims are paid from their collateral first, then senior unsecured claims, then subordinated ones, with shareholders last.
• Senior Secured Loan — A loan that ranks first for repayment and is backed by a claim on specific assets of the borrower.

Lessons that explain it

• Appraising one loan: what backs it, how thin the cushion is, and who collects — Evaluating a loan means asking how the borrower repays, what happens if they cannot, how far collateral could fall before you lose money, and how reliable the lender or platform is at recovery. (13 min)

All 578 terms in the Investing glossary