Subordination clause

(redirected from Subordination Agreements)

Subordination clause

A provision in a bond indenture that restricts the issuer's future borrowing by subordinating future lenders' claims on the firm to those of the existing bondholders.

Subordination Clause

A clause in some contracts for debt stating that in the event of bankruptcy or liquidation, the debt in the contract will take priority over all other debts. This protects the creditor in the event that the debtor defaults. It is most common in mortgages and bonds. See also: Absolute Priority Rule.
References in periodicals archive ?
Examples of such documents include loan and credit agreements, assumption agreements, indemnification agreements, subordination agreements, and correspondence with a lender concerning terms of a loan or guarantees.
obtain mortgage subordination agreements, or prepare baseline
Daghbandan called the subordination agreements the most contentious point of the loan terms and recommended that the option be made available for the business owner's landlord to take action and for the business owner's property to be foreclosed upon.
On the other hand, consensual or contractual subordination, of which the debt subordination agreements involved here are prime examples, occurs when a creditor and the bankrupt agree to create priorities among debts.
This would be impossible to achieve through subordination agreements, because preexisting creditors are unlikely to agree to subordination without substantial compensation, and the transactions costs of subordination negotiations would be high.
We will talk about subordination agreements and SNDAs later, but many prudent lenders will require the subordination of management and franchise agreements so that in the event of a default, the lender or its successor will have the option to either reaffirm and continue the arrangement under an automatically approved assignment, or the right to terminate the arrangement if it wishes to do so.
They note that, to the extent that priority violations and their attendant losses are anticipated by potential lenders, the cost of capital is increased.(115) Legal scholars concur, noting that subordination agreements should not be jeopardized in bankruptcy, the time when senior creditors depend on such agreements.
Ability and intent of a related party or entity can be documented by financial statements from that party, filing of subordination agreements by that party, and confirmation by the auditor from that party.
Section 510(a) of the Bankruptcy Code acknowledges the continued effectiveness in bankruptcy of a "subordination agreement." (27) However, courts have reached different results where the rights waived by the second lien lender in the intercreditor agreement involve basic bankruptcy rights beyond lien subordination or payment subordination.