What Is Subordinate Financing?

Subordinated debt (junior debt) is issued by the bank, with a fixed term of not less than 5 years (including 5 years), unless the bank fails or is liquidated, and is not used to make up for the bank's daily operating losses, and the debt is a right to claim The long-term debt of commercial banks that comes after deposits and other liabilities. Subordinated debt has become an important source of bank affiliated capital in most countries, and it has played an important role in improving liquidity, reducing financing costs, and strengthening market discipline.

Subordinated debt

Must not be guaranteed by a bank or third party, and must not exceed commercial

The procedure for issuing subordinated debt is: a commercial bank can decide whether to issue according to its own situation

(1) Less restrictions and high flexibility: Only requirements for sub-debt institutional investors and the consent of the borrower and the lender can be obtained, without the need for regulatory approval and simple procedures; there is no clear limit on the scale;

(2) The term is more than 3 years, which belongs to the medium and long term

In December 2003, the China Banking Regulatory Commission issued

Subordinated bonds (Subordinated Debentures) refer to a form of debt with a repayment order that is superior to the company's equity interests but lower than the company's general debt. The priority order of claims for various securities is: general debt> subordinated debt> preference shares> common shares. Securities with higher priority claims have lower risks and lower expected returns, and vice versa. Institutions often allocate assets in a certain proportion based on their own conditions in accordance with the CAPM model to balance their own risks and gains. It is important to point out that the "subordinated" in the subordinated debt is completely different from the "subordinated" in the "subordinated loan" in the five-tier classification of bank loans (normal, concerned, subordinated, suspicious, and loss). Different concepts. The term "subordinated" in a subordinated bond only refers to its "subordinated" claim, and does not mean that its credit rating is necessarily "subordinated"; the "subordinated" in the five-tier classification is related to "suspicious", "Loss" is also classified as a non-performing loan. ^[1]

Subordinated debt is a long-term debt of a commercial bank that comes after claims and deposits and other liabilities. The subordinated debt is included in the capital as follows: the remaining period is 2-3 years at 60%; the remaining period is 1-2 years at 40%; the remaining period is within 1 year at 20% .

Subordinated bonds refer to the types of bonds that are ranked after the deposits and senior bonds in the order of redemption, but before the preferred and common stocks. As a bond holder, you can only obtain the fixed interest and principal amount specified in the issuance conditions, that is, the holders of subordinated bonds cannot share the excess income of the bank, but they bear a greater risk of default.

Compared with the convertible bonds that listed banks like to issue in the early stage, the subordinated debt is equity financing, while the former is debt financing. The subordinated debt is not financed through the securities market, but is directed to raise funds from institutional investors to supplement the bank's capital.

The issuers of subordinated bonds are mainly domestic major commercial banks, and the issued funds are used to supplement the capital adequacy ratio. ^[1]