Template:M summ Credit Derivatives 3.13(b)(i)(B)

“Subordinated” means subordinated to creditors claims under regular, unsecured, senior debt. Ranking behind the taxman, customary liens, mortgages security interests, and not benefitting from credit support or collateral. Why, because if it did, regular, unsecured, senior debt would count as “subordinated, which it isn’t.

“Subordinated” indebtedness is debt with equity-like features. It sits further down the capital structure, behind the great weight of “ordinary” debt: trade creditors, banks, bondholders, rent, wage bills and so on . It is usually of a longer tenor — as long as thirty years — and may even be perpetual. It is typically callable by the issuer at anytime and this enables the issuer to manage the cost of holding this kind of capital. And it's cost is significant: in return for sitting behind ordinary creditors, a subordinated creditor can expect significantly higher yield on interest coupons which, over a long period, will account for the great majority of the return of the investment.