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. Subordinate Financing

    Debt financing that is ranked behind that held by secured lenders ...
  2. Subordination Agreement

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

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

    In real estate, a provision of an exclusive listing agreement ...
  5. Negative Pledge Clause

    A negative covenant in an indenture stating that the corporation ...
  6. Effective Net Worth

    The shareholders' equity of a corporation, plus subordinated ...
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. Insurance

    What is a Force Majeure?

    A force majeure clause frees both parties in a contract from fulfilling their obligations in the event of some catastrophic or unexpected occurrence.
  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

    Understand the Security Types of Corporate Bonds

    Any investor should be aware of the different security types regarding corporate bonds as well as the direct correlation to potential recovery rates.
  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. Investing

    Common Bond-Buying Mistakes

    Avoid these errors made daily in bond portfolios everywhere.
RELATED FAQS
  1. What is the difference between subordinated debt and senior debt?

    Understand the difference between subordinated debt and senior debt. Learn what a company is required to do in case of bankruptcy. Read Answer >>
  2. What is an alienation clause?

    Whether used in reference to insurance policies, mortgages or commercial loans, an alienation clause stipulates that should ... Read Answer >>
  3. 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 >>
  4. Can you ask your landlord to remove a waiver of subrogation clause from your lease?

    Learn how to remove a waiver of subrogation clause from a lease. Find out also why you might not want to strike this clause ... Read Answer >>
  5. How is the consumer price index (CPI) used in market escalation contracts?

    Understand the purpose of market escalation contracts and learn how the consumer price index (CPI) is often used to make ... Read Answer >>
  6. Are waivers of subrogation clauses ever ineffective in preventing a third-party lawsuit?

    Learn why a waiver of subrogation clause in your lease or construction contract is no solid guarantee that you won't end ... Read Answer >>
Hot Definitions
  1. Free Cash Flow - FCF

    A measure of financial performance calculated as operating cash flow minus capital expenditures. Free cash flow (FCF) represents ...
  2. Leverage Ratio

    Any ratio used to calculate the financial leverage of a company to get an idea of the company's methods of financing or to ...
  3. Two And Twenty

    A type of compensation structure that hedge fund managers typically employ in which part of compensation is performance based. ...
  4. Market Capitalization

    The total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying ...
  5. Expense Ratio

    A measure of what it costs an investment company to operate a mutual fund. An expense ratio is determined through an annual ...
  6. Mezzanine Financing

    A hybrid of debt and equity financing that is typically used to finance the expansion of existing companies. Mezzanine financing ...
Trading Center