Subordinate debt is a funding solution for situations where the need for capital exceeds the level of senior debt raised from margined assets, and the business demonstrates the ability to generate strong consistent cash flow.
It provides an alternative to raising additional equity and generally does not require diluting the owners’ equity position.
The debt has repayment priority behind (or subordinate to) the senior credit facilities. It is structured either unsecured or with a second security interest behind the senior lender.
As a result, the subordinated debt is riskier and demands a higher return than the senior debt. Typical yields are in the mid-to-upper teens and, in some circumstances, in the 20s.
Typical uses of subordinate debt include providing incremental funding for strategic acquisitions, buyouts, recapitalizations, and expansion projects and initiatives.