A subordinated loan or bond issue occupies an intermediate position between ordinary debt and equity capital. In case of bankruptcy or liquidation, its holders receive payments only after settlement with other creditors, but before shareholders.
Compensation for the increased risk is higher yield. Additionally, such issues are usually longer than ordinary ones and often contain conditions limiting early repayment.
Primary application is in the banking sector, where subordinated debt, if established requirements are met, is counted as part of capital. This allows a bank to increase capital without issuing new shares and diluting existing shareholders' stakes.
For an investor, it is significant that in a crisis situation, such obligations may be written off or converted into shares under the terms of the issue—before the bank's formal default. Therefore, the yield of subordinated issues should be compared not with ordinary bonds of the same issuer, but accounting for this additional risk, and attention should be paid to the rating of the specific issue, not just the issuer.