Subordinated debt

BDC defines subordinate financing as debt where the lender ranks below senior lenders in their claim on collateral. If the borrower defaults, the senior lender is repaid first from the sale of collateral, and the junior lender receives what is left.

Where it appears in an acquisition

BDC says subordinate and other junior debt are often used to finance mergers and acquisitions when there are not enough assets to secure adequate senior financing. It also describes the vendor note, where the seller helps finance the deal, as a source of acquisition funding. Whether a particular vendor note is subordinated depends on what the senior lender requires and what the documents say.

What to confirm

• BDC says the terms subordinate and junior debt can mean different things for different lenders, so ask for the lender’s own definition
• Whether the senior lender requires the vendor note to rank behind its loan, and whether payments on the note can be paused
• Which agreement records the ranking between the lenders

See what subordinating a vendor take-back means and senior debt.