Subordinated debt is a fixed income instrument with characteristics inferior to bank issues since its holder has a lower collection capacity offset by higher profitability, compared to other debt assets. It is halfway between debt and equity; It serves to complement senior debt, typically bank debt, because it covers that amount that banks cannot or do not want to finance because it would entail an excessively high concentration of risk.
The subordinated debt is a hybrid instrument since it can also be considered as own resources, which allows reducing the amount that shareholders must contribute to the business, that is, more profitability for the shares, and supports long-term growth, without affecting financing senior, external or conventional.
This financing can be viewed as “expensive debt” or “cheap equity”. It offers greater flexibility in terms of financial clauses, amortization or restrictions, but at the same time reflects greater risk than senior debt; however, it is substantially less expensive than Equity in terms of overall cost of capital.
Subordinated debt funds require a profitable company profile, which is in a leading position in its market, under the management of a committed management team, as well as compliance with a series of requirements such as a specific level of Ebitda, and a maximum leverage ratio that, depending on the type of fund, should not exceed 5-6.5x / EBITDA
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