Subordinated Debentures

Source: Encyclopedia of Banking & Finance (9h Edition) by Charles J Woelfel
(We recommend this as work of authority and you can order it here)

A type of DEBENTURE in which the provision for “subordination agreement” in its indenture renders the claim of such subordinated debentures, in the event of liquidation, dissolution, bankruptcy, or reorganization, junior to present or future debt, defined as senior thereto.  Such defined senior debt typically includes funds borrowed from banks, insurance companies, and other financial institutions, as well as all other forms of notes or other debentures not expressly subordinated.  This results in the subordinated debentures, instead of sharing ratably with other unsecured claims of general status, becoming part of the equity base as far as such defined debt, made expressly senior, is concerned.  Thus, it becomes easier to obtain bank and other loans entitled to such seniority because of the subordination agreement.  Subordinated debentures have been particularly utilized by finance companies as a financing medium in recent years.  

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