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1.Types of Subordination[Original Blog]
When it comes to subordination, it is important to understand the different types that exist. Subordination occurs when one creditor is granted a higher priority claim to assets or funds than another creditor. This can be seen in various financial structures such as corporate bonds, bank loans, and in public finance. The two main types of subordination are pari passu and structural subordination. While they may seem similar, there are some key differences between them.
1. Pari Passu: This Latin term means "equal footing" and refers to creditors who are all on the same level of priority. In other words, if a company defaults on a loan, all creditors with pari passu status would be paid back equally. This type of subordination is common in bonds and is often used to give investors more security.
For example, let's say a company issues $100 million in bonds with a 5% interest rate. If all the bonds are pari passu, then each investor would receive $5 per bond in interest payments. If the company defaults, each investor would receive an equal share of the remaining assets.
2. Structural subordination: This type of subordination occurs when a creditor is subordinated to other creditors because of the way the borrower is structured. This can happen in situations where a holding company has multiple subsidiaries. Creditors of the subsidiary may be subordinated to the holding company's creditors, who have a higher priority claim to the assets.
For example, let's say a holding company has two subsidiaries, A and B. Subsidiary A issues $50 million in bonds and Subsidiary B issues $100 million in bonds. If the holding company defaults, Subsidiary A's bondholders would be paid back before Subsidiary B's bondholders. This is because the holding company's creditors have a higher priority claim to the assets.
Understanding the types of subordination is important for investors and lenders because it affects the level of risk involved. Pari passu subordination provides more security, as all creditors are treated equally, while structural subordination can be riskier because some creditors have a lower priority claim to assets. It's important to carefully consider the terms of any financial agreement to determine the level of subordination and the associated risks.
Types of Subordination - Subordination: Pari Passu vs: Subordination: Understanding the Differences
2.Types of Subordination[Original Blog]
When it comes to understanding subordination in inverse floaters, it's important to have a clear understanding of the various types of subordination that exist. Subordination is essentially a ranking of debt, where some debts are deemed more important and are paid off before others. In the case of inverse floaters, subordination is used to determine which tranches will receive payments first and which will receive payments last. There are several types of subordination that are commonly used in inverse floaters, each with their own advantages and disadvantages.
1. Senior/Subordinated: This is the most common type of subordination used in inverse floaters. In this structure, there are two tranches of debt: senior and subordinated. The senior tranche is paid off first, followed by the subordinated tranche. This structure is relatively simple and easy to understand, which makes it a popular choice. However, it can also be risky for investors in the subordinated tranche, as they are the last to be paid and may not receive any payments at all if the underlying assets perform poorly.
2. Mezzanine/Subordinated: This structure is similar to senior/subordinated, but with an additional mezzanine tranche in between the senior and subordinated tranches. The mezzanine tranche is paid off after the senior tranche but before the subordinated tranche. This structure provides an additional layer of protection for investors in the subordinated tranche, as they are not the last to be paid. However, it can also make the structure more complex and difficult to understand.
3. Sequential: In a sequential structure, each tranche is paid off in a specific order, regardless of their seniority. For example, if there are three tranches, they might be paid off in the order of A, B, C. This structure provides more predictability for investors, as they know exactly when they will receive payments. However, it can also be risky for investors in the lower tranches, as they are paid off later and may not receive any payments at all if the underlying assets perform poorly.
4. pro rata: In a pro rata structure, each tranche is paid off proportionally based on its size. For example, if there are three tranches and tranche A is twice the size of tranche B, then tranche A will receive twice as much in payments as tranche B. This structure provides more fairness for investors, as each tranche receives a proportionate share of the payments. However, it can also be less predictable, as the payments will vary based on the performance of the underlying assets.
Overall, the best type of subordination for an inverse floater will depend on a variety of factors, including the underlying assets, the risk tolerance of investors, and the desired level of predictability. It's important for investors to carefully consider the pros and cons of each structure before making a decision. By understanding the different types of subordination, investors can make more informed decisions and mitigate the risks associated with inverse floaters.
Types of Subordination - Understanding Subordination in Inverse Floaters: A Key Risk Factor
3.Types of Subordination Agreements[Original Blog]
Subordination agreements come in different types, each with its own specific set of rules and regulations. These agreements are designed to protect the interests of different parties, including lenders, borrowers, and investors. The type of subordination agreement used will depend on the specific needs and goals of each party involved. Some of the most common types of subordination agreements include:
1. Intercreditor Agreements: These agreements are typically used when multiple lenders are involved in a single transaction. An intercreditor agreement outlines the rights and responsibilities of each lender and establishes a priority of payment in the event of default or bankruptcy.
2. Mezzanine Financings: Mezzanine financings are a type of debt financing that involves the issuance of subordinated debt. Mezzanine financing is typically used to fund growth or expansion projects and is often secured by the borrower's equity in the company.
3. Second Lien Loans: Second lien loans are a type of debt that is secured by assets that are subordinate to the assets securing the first lien debt. This type of loan is often used in leveraged buyouts and other acquisition transactions.
4. Convertible Debentures: convertible debentures are a type of debt that can be converted into equity under certain conditions. This type of financing is often used by startups and other companies that are looking to raise capital but may not have a strong credit history.
In summary, subordination agreements are an important tool for mitigating risks in transactions involving multiple parties. By establishing clear rules and priorities, these agreements help to protect the interests of all parties involved. Whether you are a lender, borrower, or investor, it is important to understand the different types of subordination agreements available and how they can be used to achieve your specific goals.
Types of Subordination Agreements - Bankruptcy Protection: Mitigating Risks with Subordination Agreements
4.Types of Subordination Agreements in Commercial Lending[Original Blog]
Subordination agreements are an essential part of commercial lending. They provide a mechanism that allows lenders to rank their security interests in case of default by a borrower. Commercial loans can involve multiple lenders, and in such cases, subordination agreements allow the lenders to establish a priority of payments. The agreement typically specifies the order in which claims are settled, and the rights of each lender in the collateral. The existence of a subordination agreement can be a crucial factor in determining the terms of a loan. From the perspective of the borrower, such agreements can limit their flexibility and increase their borrowing costs. It is, therefore, essential to have a clear understanding of the types of subordination agreements in commercial lending.
1. Intercreditor Agreement
An intercreditor agreement is a contract between two or more lenders that outlines their respective rights and responsibilities concerning a borrower's assets. The agreement usually specifies the order of payment during a default. The intercreditor agreement can be either "senior-subordinate" or "equal-subordinate." In a senior-subordinate agreement, the senior lender has priority in the collateral, while the subordinate lender's interests are subordinated. In an equal-subordinate agreement, both lenders have equal rights to the collateral, but the junior lender's interests are subordinated.
2. Subordination Agreement
A subordination agreement is a contract between the borrower and the lender. The agreement specifies the priority of the lender's claim to the borrower's assets. The lender who has the first lien on the collateral has priority in the event of default. In contrast, the lender with the second lien has a subordinated interest.
3. Collateral Access Agreement
A collateral access agreement is an agreement between a borrower and a senior lender that allows a junior lender to have access to the collateral in case of default. The junior lender typically pays a fee to the senior lender for such access.
Subordination agreements in commercial lending can be complex and involve multiple parties. For example, a mezzanine loan typically involves a subordination agreement with the senior lender. The mezzanine lender has a subordinated interest in the collateral and is paid only after the senior lender's claim is settled. In conclusion, subordination agreements are essential in commercial lending and can have a significant impact on the borrower's financial flexibility and the lender's risk management strategy.
Types of Subordination Agreements in Commercial Lending - Commercial Lending: Harnessing the Power of Subordination Agreements
5.Types of Subordination in Risk Participation[Original Blog]
In the realm of risk participation, subordination plays a crucial role in determining the order of priority in the event of a default or loss. It refers to the willingness of one party to take a backseat and accept a lower level of priority in the repayment hierarchy. This voluntary relinquishment of rights helps distribute risk across multiple parties and enhances the overall stability of financial transactions. While subordination can take various forms, each type serves a unique purpose in managing risk and ensuring the smooth functioning of the market.
1. Structural Subordination:
Structural subordination occurs when different classes or tranches of debt are created within a single transaction. These tranches have varying levels of priority in terms of repayment, with senior tranches being paid first before junior tranches. This type of subordination is commonly seen in collateralized debt obligations (CDOs) or mortgage-backed securities (MBS), where the underlying assets are divided into different risk categories. For example, in a mortgage-backed security, the senior tranches may have the first claim on the cash flows generated by the underlying mortgages, while the junior tranches bear the higher risk of default.
Contractual subordination refers to the explicit agreement between parties involved in a transaction to subordinate their claims. This type of subordination is typically achieved through the use of subordination agreements or intercreditor agreements. These agreements outline the specific terms and conditions under which one party agrees to take a subordinate position to another party. For instance, in a syndicated loan agreement, the senior lenders may require the junior lenders to sign a subordination agreement, which states that the junior lenders will be paid only after the senior lenders have been fully repaid.
Implicit subordination is a less formal form of subordination that arises from the inherent structure or characteristics of a financial instrument. It is not explicitly stated in any agreement but is understood based on the nature of the instrument. For example, in the case of convertible bonds, the bondholders have the option to convert their bonds into equity shares. By choosing to convert, the bondholders implicitly subordinate their claims to those of the existing equity shareholders. In this scenario, the bondholders take on the risk of a potential decline in the value of the equity shares, which could result in a lower recovery in the event of default.
4. Subordination by Regulation:
In some cases, subordination is mandated by regulatory authorities to ensure the stability of the financial system. For instance, banks are often required to hold subordinated debt as a form of capital buffer to absorb potential losses. This subordinated debt ranks lower in the repayment hierarchy compared to other liabilities of the bank. By imposing this requirement, regulators aim to enhance the resilience of the banking sector and protect depositors and other senior creditors. In this context, the subordination is enforced by regulatory guidelines rather than being a voluntary arrangement between parties.
As we can see, different types of subordination serve different purposes in risk participation. Whether it is through structural, contractual, implicit, or regulatory subordination, the aim is to manage risk and ensure the smooth functioning of financial transactions. Understanding these various forms of subordination is crucial for investors, lenders, and participants in the financial markets, as it helps them assess the risk-return profile of their investments and make informed decisions.
In the next section, we will delve deeper into the benefits and challenges associated with subordination in risk participation, shedding light on the key considerations when entering into such arrangements. Stay tuned for our upcoming discussion on "Subordination: balancing Risk and reward."
Types of Subordination in Risk Participation - Subordination: Taking a Backseat: Subordination and Risk Participation
6.Types of subordination clauses and their impact on bondholders[Original Blog]
Subordination clauses are an essential part of an indenture as they determine the priority of different creditors in the event of default. These clauses are widely used in bond agreements, where they affect bondholders' rights and repayment priority. Subordination clauses create different classes of creditors whose claims are satisfied in a specific order. Therefore, bondholders need to understand the different types of subordination clauses and how they impact their investment.
1. Intercreditor Subordination Clause
The intercreditor subordination clause is a common type of subordination clause. It is used to establish priority among different classes of creditors. This clause determines which creditors have priority in the event of default. For example, senior lenders have priority over junior lenders in the repayment process. The intercreditor subordination clause ensures that senior creditors are repaid before junior creditors.
2. Structural Subordination Clause
The structural subordination clause is used when a holding company issues bonds that are secured by the assets of its subsidiaries. In this case, the bondholders are subordinated to the claims of the subsidiary's creditors. The structural subordination clause is used to protect the subsidiary's creditors in the event of default. For example, if a holding company defaults, the subsidiary's creditors have priority over the holding company's bondholders.
The negative pledge clause is used to limit the ability of the borrower to pledge assets as collateral for other debts. This clause ensures that the bondholders' claims are not subordinated to the claims of other creditors. For example, if a borrower pledges an asset as collateral for another loan, the negative pledge clause ensures that the bondholders' claims are not subordinated to the claims of the new lender.
Bondholders need to understand the different types of subordination clauses and their impact on their investment. The intercreditor subordination clause, structural subordination clause, and negative pledge clause are commonly used in bond agreements. Bondholders should carefully review the indenture's subordination clauses to understand their rights and repayment priority in the event of default.
Types of subordination clauses and their impact on bondholders - Subordination Clauses in Indentures: Impact on Bondholders
7.Different Types of Subordination Agreements[Original Blog]
In loan agreements, subordination agreements play a crucial role in determining the priority of different creditors in the event of a borrower's default or bankruptcy. These agreements establish the hierarchy of debt repayment and ensure that lenders are protected in case of financial distress. There are several types of subordination agreements that may be used depending on the specific circumstances of the loan agreement. In this section, we will explore some of the different types of subordination agreements commonly encountered.
1. Intercreditor Agreements: Intercreditor agreements are often used in situations where there are multiple creditors involved in a loan agreement. These agreements establish the order in which each creditor will be repaid in the event of default. For example, a first-lien lender may require a second-lien lender to sign an intercreditor agreement, which subordinates the second-lien lender's claim to that of the first-lien lender. This ensures that the first-lien lender will be repaid first before the second-lien lender receives any funds.
2. Mezzanine Financing Subordination Agreements: Mezzanine financing involves providing a loan that is subordinate to senior debt but senior to equity in terms of repayment priority. In this type of subordination agreement, the mezzanine lender agrees to subordinate its claim to that of the senior lender. This provides additional security to the senior lender, as it ensures that their claim will be satisfied before the mezzanine lender is repaid.
3. Leasehold Subordination Agreements: Leasehold subordination agreements are commonly used in real estate transactions where the borrower leases the property to a tenant. In this agreement, the tenant agrees to subordinate their leasehold interest to the lender's mortgage interest. This means that in the event of default, the lender has the right to terminate the lease and take possession of the property.
Tips for Negotiating Subordination Agreements:
- Clearly define the priority of creditors: It is essential to clearly define the order in which creditors will be repaid in the subordination agreement. This will help avoid any confusion or disputes in the future.
- Consider the interests of all parties involved: When negotiating a subordination agreement, it is crucial to consider the interests of all parties involved. Each creditor will have different concerns and priorities, and finding a balance that satisfies everyone is key.
- Seek legal advice: Subordination agreements can be complex and legally binding documents. It is always advisable to seek legal advice from a qualified attorney who specializes in loan agreements and subordination agreements.
Case Study: A real estate developer, ABC Properties, secures a construction loan from Bank A and later seeks additional financing from Bank B to complete the project. Bank A requires Bank B to sign an intercreditor agreement, which subordinates Bank B's claim to that of Bank A. This ensures that Bank A will be repaid first in the event of default, providing them with a higher level of security.
Understanding the different types of subordination agreements and their implications is crucial for both borrowers and lenders. These agreements help establish a clear hierarchy of debt repayment and protect the interests of all parties involved. By carefully negotiating and structuring subordination agreements, borrowers and lenders can mitigate risks and ensure a smooth resolution in case of default or financial distress.
Different Types of Subordination Agreements - Subordination agreement: What You Need to Know About Subordination Agreements in Loan Agreements
8.Types of Subordination in Senior Bank Loans[Original Blog]
Subordination is a key feature of senior bank loans, and it refers to the hierarchy of claimants in case of a default. Specifically, subordination determines the order in which different parties receive payments from the borrower's assets. In this context, there are different types of subordination that can affect the risk and returns of senior bank loans. In this section, we will explore some of these types and their implications.
1. Structural Subordination: This refers to the subordination that arises from the legal structure of the borrower's capital structure. Specifically, if the borrower has multiple layers of debt, with some debt being senior to other debt, then the senior debt is structurally subordinated to the more senior debt. For example, if a company has issued both senior secured debt and subordinated debt, then the subordinated debt is structurally subordinated to the senior secured debt. This means that in case of a default, the senior secured debt holders will be paid first, and only after they have been fully paid will the subordinated debt holders receive any payments.
2. Contractual Subordination: This refers to the subordination that arises from the terms of the loan agreement. Specifically, the loan agreement may specify that certain creditors are subordinated to other creditors. For example, the loan agreement may specify that the borrower's management team has subordinated debt, which means that they will only receive payments after the senior debt holders have been fully paid. This type of subordination can provide some protection to senior debt holders, as it limits the claims of other creditors in case of a default.
3. Collateral Subordination: This refers to the subordination that arises from the priority of the collateral securing the loan. Specifically, if the borrower has multiple layers of debt secured by different assets, then the senior debt is collateral subordinated to the more senior debt. For example, if a company has issued both senior secured debt backed by specific assets and subordinated debt backed by other assets, then the subordinated debt is collateral subordinated to the senior secured debt. This means that in case of a default, the senior secured debt holders will have a priority claim on the assets backing their debt, and only after they have been fully paid will the subordinated debt holders receive any payments.
Each type of subordination has its own implications for the risk and returns of senior bank loans. Structural subordination is inherent in the borrower's capital structure and cannot be altered, while contractual subordination and collateral subordination can be negotiated and may provide some protection to senior debt holders. As such, it is important for investors to carefully consider the different types of subordination when evaluating senior bank loans.
Types of Subordination in Senior Bank Loans - Subordination in Senior Bank Loans: Its Impact on Risk and Returns
9.Types of Subordination in Companion Tranches[Original Blog]
Subordination is a complex concept that plays a crucial role in the functioning of companion tranches. Companion tranches refer to a type of mortgage-backed security that is divided into two or more tranches based on their seniority. The senior tranche is considered less risky and is paid first, while the junior tranche is considered more risky and is paid last. Subordination refers to the arrangement in which the junior tranche is subordinated to the senior tranche in terms of cash flows. In this section, we will discuss the different types of subordination in companion tranches.
1. Hard Subordination
Hard subordination is the most common type of subordination in companion tranches. In this arrangement, the junior tranche is subordinated to the senior tranche in terms of cash flows. The senior tranche receives all the cash flows until it is fully paid off, and only then does the junior tranche receive any cash flows. Hard subordination provides a clear hierarchy of cash flows and ensures that the senior tranche is less risky than the junior tranche.
Soft subordination is a less common type of subordination in companion tranches. In this arrangement, the junior tranche receives a small percentage of the cash flows before the senior tranche is fully paid off. Soft subordination provides some protection to the junior tranche, but it also makes the senior tranche slightly riskier.
3. Partial Subordination
Partial subordination is a hybrid of hard and soft subordination. In this arrangement, the junior tranche is subordinated to the senior tranche, but it also receives a fixed percentage of the cash flows before the senior tranche is fully paid off. Partial subordination provides some protection to the junior tranche, but it also introduces some complexity to the cash flows.
4. Non-Subordination
Non-subordination is a rare type of subordination in companion tranches. In this arrangement, the senior and junior tranches receive the same cash flows, and there is no hierarchy of cash flows. Non-subordination is typically used in very low-risk mortgage-backed securities, where the risk of default is negligible.
The type of subordination in companion tranches depends on the risk profile of the mortgage-backed securities. Hard subordination is the most common type of subordination and provides a clear hierarchy of cash flows. Soft subordination and partial subordination provide some protection to the junior tranche but also introduce some complexity to the cash flows. Non-subordination is rare and is typically used in very low-risk mortgage-backed securities. Investors should carefully consider the type of subordination before investing in companion tranches.
Types of Subordination in Companion Tranches - Subordination: Unraveling the Subordination Puzzle of Companion Tranches
10.Types of Subordination in Credit Risk Mitigation[Original Blog]
In credit risk mitigation, subordination plays a crucial role in reducing the potential losses for investors. By creating a hierarchy of claims, subordination ensures that certain parties bear the brunt of any losses before others. This risk-sharing mechanism provides stability and confidence to investors, allowing them to make informed decisions. There are several types of subordination commonly used in credit risk mitigation, each serving a specific purpose. Let's explore three of these types in more detail:
1. Structural Subordination:
Structural subordination involves creating a hierarchy of claims based on the capital structure of a company or financial institution. In this type of subordination, senior debt holders are prioritized over subordinated debt holders in the event of default. For example, if a company goes bankrupt, the senior bondholders will have the first right to the company's assets, while the subordinated bondholders will only receive their share after the senior bondholders have been fully compensated. This type of subordination provides a clear order of repayment and helps protect senior debt holders from losses.
2. Collateral Subordination:
Collateral subordination is a type of subordination that arises when multiple layers of debt are secured by the same collateral. In this case, the debt with the highest priority is secured first, followed by the debt with lower priority. For instance, in a mortgage-backed security (MBS), the senior tranches are backed by the most secure and valuable assets, while the lower tranches are backed by riskier assets. In the event of default, the senior tranches will be paid first from the proceeds of the collateral, leaving less for the subordinated tranches. Collateral subordination helps allocate the risk among different investors based on their level of exposure to the underlying collateral.
3. Time Subordination:
Time subordination refers to the prioritization of debt based on its maturity. In this type of subordination, debt with longer maturity is considered more senior than debt with shorter maturity. For example, in a securitization transaction, the longer-dated tranches are typically considered senior to the shorter-dated tranches. This is because longer-dated debt is exposed to market and interest rate risks for a longer period, making it riskier. Time subordination helps control the timing of cash flows and manage the risk associated with different debt maturities.
These three types of subordination are effective tools in credit risk mitigation, as they provide a clear framework for allocating losses and protecting the interests of investors. By understanding the different types of subordination, investors can assess the level of risk associated with their investments and make informed decisions. It is important to note that subordination alone may not eliminate all risks, but it certainly enhances the overall risk management framework in credit transactions.
Types of Subordination in Credit Risk Mitigation - The Significance of Subordination in Credit Risk Mitigation 2
11.Types of Subordination in Credit Risk Mitigation[Original Blog]
In credit risk mitigation, subordination plays a crucial role in reducing the potential losses for investors. By creating a hierarchy of claims, subordination ensures that certain parties bear the brunt of any losses before others. This risk-sharing mechanism provides stability and confidence to investors, allowing them to make informed decisions. There are several types of subordination commonly used in credit risk mitigation, each serving a specific purpose. Let's explore three of these types in more detail:
1. Structural Subordination:
Structural subordination involves creating a hierarchy of claims based on the capital structure of a company or financial institution. In this type of subordination, senior debt holders are prioritized over subordinated debt holders in the event of default. For example, if a company goes bankrupt, the senior bondholders will have the first right to the company's assets, while the subordinated bondholders will only receive their share after the senior bondholders have been fully compensated. This type of subordination provides a clear order of repayment and helps protect senior debt holders from losses.
2. Collateral Subordination:
Collateral subordination is a type of subordination that arises when multiple layers of debt are secured by the same collateral. In this case, the debt with the highest priority is secured first, followed by the debt with lower priority. For instance, in a mortgage-backed security (MBS), the senior tranches are backed by the most secure and valuable assets, while the lower tranches are backed by riskier assets. In the event of default, the senior tranches will be paid first from the proceeds of the collateral, leaving less for the subordinated tranches. Collateral subordination helps allocate the risk among different investors based on their level of exposure to the underlying collateral.
3. Time Subordination:
Time subordination refers to the prioritization of debt based on its maturity. In this type of subordination, debt with longer maturity is considered more senior than debt with shorter maturity. For example, in a securitization transaction, the longer-dated tranches are typically considered senior to the shorter-dated tranches. This is because longer-dated debt is exposed to market and interest rate risks for a longer period, making it riskier. Time subordination helps control the timing of cash flows and manage the risk associated with different debt maturities.
These three types of subordination are effective tools in credit risk mitigation, as they provide a clear framework for allocating losses and protecting the interests of investors. By understanding the different types of subordination, investors can assess the level of risk associated with their investments and make informed decisions. It is important to note that subordination alone may not eliminate all risks, but it certainly enhances the overall risk management framework in credit transactions.
Types of Subordination in Credit Risk Mitigation - The Significance of Subordination in Credit Risk Mitigation update
12.Types of Subordination in CMBS[Original Blog]
Subordination in CMBS is a critical aspect that protects the interests of investors. There are different types of subordination in CMBS, and each has its unique features and benefits. In this section, we will explore the different types of subordination in CMBS and their characteristics.
1. Senior/Subordinate Structure
The senior/subordinate structure is the most common type of subordination in CMBS. In this structure, the cash flows from the underlying loans are first used to pay the senior bondholders. Once the senior bondholders are paid, the remaining cash flows are used to pay the subordinate bondholders. The senior bonds are considered less risky as they are paid first, while the subordinate bonds are considered riskier as they are paid last.
2. Sequential Pay Structure
The sequential pay structure is another type of subordination in CMBS. In this structure, the cash flows from the underlying loans are first used to pay the senior bondholders. Once the senior bondholders are paid, the remaining cash flows are used to pay the subordinate bondholders. However, in this structure, the subordinate bonds are paid in a sequential order based on their priority. The bonds with the highest priority are paid first, and the bonds with the lowest priority are paid last.
3. Mezzanine/Subordinate Structure
The mezzanine/subordinate structure is a type of subordination that combines the features of the senior/subordinate structure and the sequential pay structure. In this structure, the cash flows from the underlying loans are first used to pay the senior bondholders. Once the senior bondholders are paid, the remaining cash flows are used to pay the mezzanine bondholders. The mezzanine bondholders have a priority over the subordinate bondholders and are paid before them.
The Parri Passu structure is a type of subordination where all bonds have equal priority. In this structure, the cash flows from the underlying loans are divided equally among all the bondholders. This structure is not commonly used in CMBS as it is considered less protective for investors.
The senior/subordinate structure is the most common type of subordination in CMBS, as it provides a clear hierarchy of payments and protects the interests of the senior bondholders. The sequential pay structure is also effective in protecting the interests of the senior bondholders, but it may not be suitable for complex transactions. The mezzanine/subordinate structure provides a balance between the senior/subordinate structure and the sequential pay structure, making it suitable for transactions with multiple layers of subordination. The Parri Passu structure is not commonly used in CMBS, as it does not provide a clear hierarchy of payments and may not protect the interests of investors.
Conclusion
Subordination is a critical aspect of CMBS that protects the interests of investors. There are different types of subordination in CMBS, and each has its unique features and benefits. Investors should carefully consider the type of subordination used in a transaction and its suitability for their investment objectives.
Types of Subordination in CMBS - Unraveling Subordination in CMBS: Protecting Investor Interests