Subordinate debt — also called subordinated debt, junior debt, or mezzanine debt — is a category of debt that ranks below senior secured debt (and other higher-priority creditors) in the repayment hierarchy (the 'waterfall') in the event of a borrower's bankruptcy, liquidation, or restructuring. Because subordinated debt holders are paid only after senior creditors have been fully repaid, they face a higher risk of not recovering their principal in a default scenario — and therefore demand higher interest rates to compensate for this additional risk. Common forms of subordinated debt include Tier 2 capital bonds issued by banks (to meet regulatory capital requirements), mezzanine financing in leveraged buyouts, and junior tranches of securitised instruments. For fixed income investors on Ventura Securities evaluating bank bonds (AT1 bonds, Tier 2 bonds) and corporate NCDs, understanding the subordination structure of a debt instrument is critical — subordinated instruments carry materially higher credit risk than senior secured debt of the same issuer, requiring thorough credit analysis of the issuer's financial strength, capital adequacy, and loss absorption capacity before investment.
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