The order by which claims for ownership or interest in a set of assets are prioritized for payment and settlement. Subordination is the lowering of payment priority as a right or claim set against another right or claim.

In financing transactions, subordination is an arrangement where a creditor (known as a junior creditor) agrees that payment of its right or claim will not be made until the right or  claim of  a senior creditor is made or settled. Subordination implies that a lender will not have access to a borrower’s assets until the assets of senior debtors are used for settlement. Hence, the risk for lenders increase with subordination and vice versa. The higher risk involved entails higher interest rates on subordinated debt. A subordinated debt is a classification of debt (whether in the form of loans, securities or similar items) that ranks below other classes of debt in terms of claims on an issuer’s assets or earnings in case it (the issuer) falls into liquidation or bankruptcy. Subordinated debt represents the debt tranches lower in priority of repayment compared to senior secured debt instruments (first lien instruments).

For example, a company’s debt may include its issued subordinated notes (or high-yield bonds), which are subordinated to senior loans obtained by the company.

A subordination agreement is a subcategory of intercreditor agreement that governs the priority of two or more creditors’ debts and claims.