Subordinated Debt

Subordination is a contractual agreement to be paid later, and in a liquidation later frequently means not at all — recovery rates on subordinated debt are far below those on senior debt because the senior claims consume the available assets first. The higher coupon is compensation for that position in the queue, not a bargain. Banks issue subordinated instruments as Tier 2 capital precisely because regulators want loss-absorbing layers below depositors. The word appears in the offer document rather than in the marketing material, which is why the seniority of any bond should be checked before the yield is admired.