Subordinated debt

Sources of finance for company acquisitions as mentioned above can be from reserves or maybe taken a senior or subordinated debt. Alternatively a bond may be issued with various characteristics offering an annuity, a balloon payment or a combination of the two. A variety of convertible structures have been utilized for this purpose as asset sales and the use of the target s balance sheet. There has also been a place for royalty transactions where the future-value of product cash flows are securitized to provide capital in the near term to achieve a company acquisition. 

Second, the Black Cox s model includes subordinated debt in which the payment of the junior bond is subordinated to the senior debt. At maturity, the payment to the junior debt is made only if the debt obligation of the senior debt holder is satisfied ... 

JPMorgan s SUSI index focuses on the largest (issues size >= 400 million) and most liquid issuances in the European subordinated debt market. The SUSI subindices cover Bank Lower Tier II, Banker Upper Tier II, Bank Tier I, Insurance Subordinated as well as Landesbanks Lower Tier II and Tier I. With the exception of the Landesbanks subindices, all SUSI indices are available in and . The composition of each index is revisited every six months. 

Asset Class Focus on European subordinated debt because of the yield pickup for what is perceived as little incremental risk compared to senior debt. 

An attractive way of getting exposure to higher quality names is through subordinated debt. The most ubiquitous form of subordinated debt in the market is bank capital securities. It needs to be noted that... 

Second, the model overcomes the subordination among several debt categories. 

The basic statement of MM with respect to the capital structure can be transferred to the structure of a company s debt the mixture of short- and long-term liabilities, secured and unsecured, subordinated and unsubordinated debt is irrelevant, too. 

In addition to debt, there may be unrated subordinated—or equity—interests issued. Although the equity interest in a CDO is structured like a bond, it does represent the residual interest in the CDO vehicle its return is variable and linked to the residual value of the collateral pool after all debt liabilities have been extinguished. Given that the equity resides in the first loss position, it carries the greatest risk and warrants the highest return—and represents a leveraged exposure to the asset class. More is offered on CDO equity later in this chapter. 

There is a legitimate concern over whether structural subordination, which has the effect of further removing bondholders from the operating assets and cash flows of the company, would have a detrimental effect on postbankruptcy recovery rates. In 2001 and 2002, the European market was just beginning to develop the infrastructure needed to analyze the legal aspects of debt workouts. Clearly, some concessions needed to be made by both issuers and the bankruptcy courts in order to preserve the market s appeal for underwriters and investors. 

In capital structure arbitrage, investors exploit yield mismatches between two loans from the same reference entity. Say an issuer has two debt instruments outstanding a commercial bank loan paying 330 basis points over LIBOR and a subordinated bond issue paying LIBOR plus 230 basis points. This yield anomaly can be exploited with a total return swap in which the arbitrageur effectively purchases the bank loan and sells the bond short. 

If the company has issued secured debt, this will rank above senior and subordinated unsecured debt. 

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