A category of loans (debts) that that ranks relatively low on the scale of repayment priority amongst other sources of funding and capital. In terms of seniority, subordinated loans rank below more senior loans or securities in a company’s capital sources (capital structure) with regards to claims on its assets and earnings. A company’s capital layers reflect the various sources of capital stacked up in order of priority, starting with senior debt (unsubordinated debt), subordinated loan, and equity. This hierarchy also illustrates that shareholders have the highest return profile (and correspondingly, highest amount of risk), followed by subordinated debt creditors and senior debt holders, as per the deal of the risk borne by each layer. In the event of liquidation, unsubordinated debt creditors will have highest priority in terms of payment, and shareholders will only be paid after all debt creditors have been paid.

Subordinated loan holders receive payment of after the senior debt has been fully settled in the event of a liquidation. A subordinated loan is repaid only after the senior loans have been fully repaid in the case where a borrower defaults on its obligations. Given the low ranking status, subordinated loans are riskier than senior loans and therefore require a higher interest rate as compensation for the additional risk involved.

For assigning a credit score, credit agencies evaluate the default risk of subordinated loans in terms of quality and ability to repay. Credit rating agencies assign high yield debts (and their issuers) certain credit scores to provide reliable guidance to potential investors who might be interested in holding these debts or investing in their issuers.

High yield bonds and mezzanine debt are examples of subordinated loans. High yield bonds are publicly traded securities that allow the holders to buy and sell them in secondary market transactions. Mezzanine loans are not tradeable, being privately negotiated transactions.

A subordinated loan is also known as subordinated debt, subordinated debenture, and junior debt.