What is a subordinated loan?

Banking experts know first hand what a subordinated loan is, to whom and for how long it is issued. This form of lending to legal entities is mutually beneficial for both the borrower and the one who issued such a loan.

What does subordinated loan mean?

What does subordinated loan mean?

Subordinated loans are loans issued to legal entities for a period of at least five years, loans, including bonds, deposits. The main condition of such financing for money management is that the one who issues a subordinated loan does not have the right to demand repayment from the borrower of such a loan, provided that the borrower does not violate the terms of the loan agreement. That is, early repayment will not be possible if the loan taken is subordinated.

For a subordinated loan, the main debt is paid in a one-time payment upon the expiration of the loan agreement, that is, after five years (by the way, the maximum term for subordinated lending is not set, therefore, the term of such a loan can be any, virtually unlimited, but by law – at least five years). Drawing analogies for a simpler understanding of this form of money loan: a microloan in an MFI is a kind of subordinated microloan issued for a period of one to thirty days, and payment on it fully occurs at the end of the loan term. The interest rate on a subordinated loan remains unchanged for all 5 years and cannot differ significantly from the market rates of similar loans.

If the borrower is declared bankrupt, then its debt subordinated loan is repaid in the last turn, which is very beneficial for legal entities. It is not possible to terminate such a subordinated loan or amend the contract without agreement. An application for early repayment and amendments to the subordinated loan agreement will be considered precisely by the employees of the bank. Under certain conditions, subordinated loans are included in the capital of the banks that received them.

What is a subordinated loan issued for?

What is a subordinated loan issued for?

The anti-crisis measure is the main reason why subordinated credit is taken by legal entities, such a loan is a tool for managing capital (more precisely, an increase in this capital itself). Such loans can help the company survive the vicissitudes of the financial crisis and the instability of the market economy, and gain some financial stability. In the literature you can still find the name – a subordinated irrevocable loan or abbreviated subord, provided for a period of at least five years.

To obtain a subordinate, the following conditions must be met:

  • Such loans are issued by a legal entity (commercial firms, government agencies), but an individual may well become an investor in such loans. In general, for the lender, this form of financing is very attractive from the point of view of benefits, since at the end of the term of the contract the lender will receive a solid cash.
  • The main recipients of such irrevocable loans are banks, insurance companies, leasing companies and companies that need to provide capital. A subord in principle resembles a contribution, but the principle of operation is somewhat different.
  • Given the specific form of the loan, the interest rate per annum cannot exceed the refinancing rate.
  • No additional collateral is required for such a loan.
  • Loan amount is not limited.
  • Upon receipt of a subordinate, the authorized capital of the loan recipient plays a role: an irrevocable loan for an amount exceeding the authorized capital by thirty-three percent or more is taxed.
  • Necessary documents for obtaining a loan: confirmation of the financial position of the borrower, charters of legal entities and passports of individuals participating in the loan agreement. The loan agreement is certified by a notary and is concluded in its presence.