Hedge Fund Glossary

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Contractual Subordination

Subordination provisions that contractually require the Bondholders to “fork over” to a specified class of senior Lenders anything they get in a liquidation of the company until the senior Lenders are paid in full. This is an express agreement by the holders of the Junior Debt to be Subordinated. Note that the holders of Senior Debt cannot effect this type of Subordination without the agreement of the holders of the Junior Debt. In other words, you don’t get to be Senior Debt by saying you are Senior Debt; you get to be Senior Debt by persuading the other creditor to say s/he is Junior Debt. See Subordination.

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