What is 'Unsubordinated Debt'

Unsubordinated debt is a loan or security that ranks above other loans or securities with regard to claims on assets or earnings.

Unsubordinated debt is also known as a senior security.

BREAKING DOWN 'Unsubordinated Debt'

There are two terms that can be used to classify debt – subordinated debt and unsubordinated debt. Subordinated debt is debt that is ranked below all senior debts of a company. The junior debt is subject to subordination in the event of default or bankruptcy. When a company’s assets are liquidated to pay off its debt obligations, all the senior debts would be paid off in full first from the assets and earnings of the company. After senior creditors have been paid, subordinated debtholders will receive payment if anything is left. In some cases, there is no cash left after paying the unsubordinated lenders.

Unsubordinated debt is senior debt that is ranked above all types of debt in the case of insolvency or bankruptcy. In the case of default, creditors with unsubordinated debt would get paid out in full before the junior debt holders. In most case, a loan is determined to be unsubordinated based on the amount and length of time outstanding in comparison with other loans. Most loans from financial institutions and certain high-grade debt securities such as mortgage bonds are senior debt. Because senior debt has a relatively secure claim, it is less risky from the point of view of the lender and, thus, pays a lower rate of interest compared with debt of the same issuer having a subordinate claim. This means, lenders are willing to accept lower interest rates for debt with higher priority over claims of a borrower’s assets since lenders will be repaid first during a liquidation event.

Of all a company’s total debt and equity issuance, unsubordinated debt is prioritized first, followed by subordinated debt, before preferred and common equity are considered. Examples of unsubordinated debt include exchange-traded notes (ETNs), collateralized securities, and certificates of deposit (CDs). Collateralized securities, such as mortgage-backed securities (MBS) are structured with a number of tranches which bear different risks, interest rates, and maturities. Tranches with a higher claim on underlying assets are safer than and senior to junior tranches with a second lien. In addition, senior tranches have a higher credit rating than junior tranches and are paid first.

 

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