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2014 ISDA Credit Derivatives Definitions
A Jolly Contrarian owner’s manual™
3.13(b)(i)(B) in a Nutshell™
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3.13(b)(i)(B) in all its glory
- 3.13(b)(i)(B) “Subordination” means, with respect to an obligation (the “Second Obligation”) and another obligation of the Reference Entity to which such obligation is being compared (the “First Obligation”), a contractual, trust or similar arrangement providing that
- (I) upon the liquidation, dissolution, reorganization or winding-up of the Reference Entity, claims of the holders of the First Obligation are required to be satisfied prior to the claims of the holders of the Subordinated Second Obligation , or
- (II) the holders of the Second Obligation will not be entitled to receive or retain principal payments in respect of their claims against the Reference Entity at any time that the Reference Entity is in payment arrears or is otherwise in default under the First Obligation.
- “Subordinated” will be construed accordingly. For purposes of determining whether Subordination exists or whether an obligation is Subordinated with respect to another obligation to which it is being compared,
- (x) the existence of preferred creditors arising by operation of law or of collateral, credit support or other credit enhancement or security arrangements shall not be taken into account, except that, notwithstanding the foregoing, priorities arising by operation of law shall be taken into account where the Reference Entity is a Sovereign and
- (y) in the case of the Reference Obligation or the Prior Reference Obligation, as applicable, the ranking in priority of payment shall be determined as of the date as of which it was issued or incurred (or in circumstances where the Reference Obligation or a Prior Reference Obligation is the Standard Reference Obligation and “Standard Reference Obligation” is applicable, then the priority of payment of the Reference Obligation or the Prior Reference Obligation, as applicable, shall be determined as of the date of selection) and, in each case, shall not reflect any change to such ranking in priority of payment after such date; and
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Resources and Navigation
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Overview
Part of the great Section 3.13 military industrial complex.The ’squad getting itself well and truly tangled up trying to explain one thing in relation to another. We all instictively know what subordination is, but when it comes to laying it out, ISDA’s crack drafting squad™ shows just how hard you can make that job if you really put your mind to it.
Summary
“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.
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See also
References