A definition of subordinated debt is the long-term financial product for which an investment is made, usually with a profitability higher than that of other current debt assets, such as bonds, and linked to the financial performance of the issuing company. It is also known as a hybrid capital title, since it has the characteristics of the shares, in addition to conditions that can lead to think that it is a common debt security.
Types of subordinated debt
There are three classes of subordinated debt, which will depend on the time and type of maturity:
- Redeemable: the principal of the investment is returned on a specific date.
- Not redeemable: there is no return of the principal and it consists of a perpetual investment.
- Corvertible: the principal is returned for its equivalent in shares within a specified period.
Subordinated debt characteristics
The subordinated debt concept is a bond similar to simple bonds, with the difference in the 'collection priority', which implies that in the event of liquidation, the collection of these bonds by their holders is conditional on the rest of the creditors Common has collected its share of the debt.
In the event that the subordinated debt has the category of special, it can become perpetual. If so, if the issuer incurs accounting losses, the interest payments are deferred or lost. With this type of product, the investor may lose the entire amount invested, since the subordinated debt securities are not guaranteed with the 100.000 euros of the Deposit Guarantee Fund. It is, therefore, a high risk product.
In Spain, among the main issuers of subordinated debt are financial entities such as Banco Popular, Bankia, Caja EspaƱa, and other companies such as Eroski, Pescanova or Fagor.