What is a subordinated loan?

A subordinated loan is a form of bond that is only repaid in the event of the issuing company's bankruptcy after all other creditors have been satisfied. Due to the increased risk this entails, the issuing institution usually offers a higher interest rate (coupon) than on ordinary bonds. This makes subordinated loans attractive to investors looking for higher returns, but who are also willing to take more risk.

Subordinated loans are often used in acquisitions, such as management buy-outs (MBOs), where extra financing is needed but the available collateral is limited. The risk for the lender is greater, but the potential reward can be too.

Example: In 2018, RR Mechatronics issued a subordinated loan of 3.5 million euros via the NPEX stock exchange with an interest rate of 8% per year to finance their growth.