What is a 'Subordination Clause'

A subordination clause is a clause in an agreement which states that the current claim on any debts will take priority over any other claims formed in other agreements made in the future. Subordination is the act of yielding priority.

BREAKING DOWN 'Subordination Clause'

A subordination clause effectively makes the current claim in the agreement senior to any other agreements that come along after the original agreement. These clauses are most commonly seen in mortgage contracts and bond issue agreements. For example, if a company issues bonds in the market with a subordination clause, it insures that if more bonds are issued in the future the original bondholders will receive payment before the company pays all other debt issued after it. This is added protection for the original bondholders as the likelihood of them getting their investment back is higher with a subordination clause.

RELATED TERMS
  1. Subordinated Debt

    A loan (or security) that ranks below other loans (or securities) ...
  2. Subordination Agreement

    A legal agreement which establishes one debt as ranking behind ...
  3. Subordinate Financing

    Debt financing that is ranked behind that held by secured lenders ...
  4. Convertible Subordinate Note

    A short-term debt security that can be changed into common stock. ...
  5. Extender Clause

    In real estate, a provision of an exclusive listing agreement ...
  6. Acceleration Covenant

    A clause included in certain debt securities and swap agreements ...
Related Articles
  1. Small Business

    Understanding Subordinated Debt

    A loan or security that ranks below other loans or securities with regard to claims on assets or earnings.
  2. Personal Finance

    Why Your Will Needs a 'Titanic Clause'

    If you don't have a Titanic clause in your will and disaster strikes, there's no guarantee that your intended beneficiaries will inherit your assets.
  3. Investing

    Corporate Bonds and the Importance of Covenants

    Any type of investor, private or institutional, should be acquainted with the significance of covenants in corporate bond agreements.
  4. Insurance

    Life Insurance Clauses Determine Your Coverage

    Understanding these key parts of your policy will help you to ensure that your family will be covered.
  5. Investing

    Is The Santa Claus Rally For Real?

    Will Santa Claus bring the gift that investors are looking for this year? What are the chances of a Santa Claus rally?
  6. Investing

    Contingency Clauses In Home Purchases Contracts

    Real estate contracts often contain contingency clauses, which are conditions or actions that must be met for a contract to be binding.
  7. Investing

    Not All Debt Holders Are Equal

    Senior debt is borrowed money a company repays first if the company goes out of business.
  8. Investing

    How Corporate Events Affect Stock- And Bondholders

    Investors tend to buy either stocks or bonds, but rarely choose between the two. Find out when you'll benefit from one over the other.
  9. Small Business

    What is Price Discrimination?

    Price discrimination occurs when a company charges different customers different prices for the same goods or services.
RELATED FAQS
  1. What is a "force majeure"?

    A force majeure is derived from the French term meaning "greater force" and refers to any natural and unavoidable catastrophe. ... Read Answer >>
  2. Which terms should be included in a partnership agreement?

    Understand what specific terms should be included in a business partnership agreement and how each affects the partners in ... Read Answer >>
  3. What is a convertible bond?

    A convertible bond is a bond issued by a corporation that, unlike a regular bond, gives the bondholder the option to trade ... Read Answer >>
Hot Definitions
  1. North American Free Trade Agreement - NAFTA

    A regulation implemented on Jan. 1, 1994, that eventually eliminated tariffs to encourage economic activity between the United ...
  2. Agency Theory

    A supposition that explains the relationship between principals and agents in business. Agency theory is concerned with resolving ...
  3. Treasury Bill - T-Bill

    A short-term debt obligation backed by the U.S. government with a maturity of less than one year. T-bills are sold in denominations ...
  4. Index

    A statistical measure of change in an economy or a securities market. In the case of financial markets, an index is a hypothetical ...
  5. Return on Market Value of Equity - ROME

    Return on market value of equity (ROME) is a comparative measure typically used by analysts to identify companies that generate ...
  6. Majority Shareholder

    A person or entity that owns more than 50% of a company's outstanding shares. The majority shareholder is often the founder ...
Trading Center