Subordinated Loans, sometimes also referred to as Subordinated Debts or Subordinated Liabilities, can in particular circumstances be used to help meet a firm’s regulatory capital requirement or own funds.
However Subordinated loans can only be eligible capital if they meet all of the criteria set out by the regulators, which can vary depending upon a firm’s prudential category.
Examples of Subordinated Loan Conditions:
The regulator’s have strict conditions on what can be considered a Subordinated loan. For example, where eligible, a short term subordinated loan must have an original maturity of at least two years or, where it has no fixed term, be subject to two years’ notice of repayment. On the other hand, a long term subordinated loan must have an original maturity of at least five years or, where it has no fixed term, be subject to five years’ notice of repayment.
In addition, there must be a written agreement that clearly sets outs all of the Subordinated Loan terms and restrictions for both the borrower and lender.
The FCA have provided a typical example of a subordinated loan as being:
“when a director of a company invests money in the form of debt, rather than in the form of stock. If there is a liquidation the director is paid before stockholders – assuming there are assets to distribute after all other liabilities and debt have been paid”.