What is Subordination Clause?
Definition of Subordination Clause
In finance, subordination refers to the order of priorities in claims for ownership or interest in various assets.
Subordination clause is an agreement which states that the current claim on any debts will take priority over any other claims formed in other agreements made in the future.
Explanation of Subordination Clause
Subordination clauses are most commonly seen in mortgage contracts and bond issue agreements. For example, if a company issues bonds in the market with a subordination clause, it insures that if more bonds are issued in the future the original bondholders will receive payment before the company pays all other debt issued after it. This is added protection for the original bondholders as the likelihood of them getting their investment back is higher with a subordination clause.