Debt having a claim against the issuer's assets that is lower ranking, or junior to, other obligations, and is paid after claims to holders of senior securities are satisfied. Credit has differing levels of claim, depending on how a financing is structured; thus, an obligation can be senior to one claim, but subordinate to another. For example, a subordinated debenture is junior to a mortgage-backed bond, but has precedence over dividend payments to stockholders.
A Real Estate Mortgage Investment Conduit (Remic), which invests in a pool of mortgages, typically sells interests in these mortgages through multiclass senior/subordinated securities to improve the marketability of REMIC securities. The subordinated debt class absorbs all the credit risk and default risk of one or more senior debt classes. Subordinated obligations also are used commonly in Mezzanine Level financings arranged in corporate leveraged buyouts and restructurings.
