A Subordinated Notes is a legal document as well as a debt instrument which is issued to a company or organization by its lender. The difference between other debt instruments and a Subordinated Notes is the fact that here the lenders will be charging a relatively very high rate of interest as compared to that mentioned in the prior notices, owing to the fact that the other notices have not been prioritized by the said company. When such a debt instrument is issued to an organization, it is mostly commonly denoted by the term “Senior Debt.”
One of the most important aspects to note here is the fact that the issuers of this note have previously agreed to issue Subordinated Notes at a higher interest in the event that the said company doesn’t take previously issued notices on priority.
When Do You Need a Subordinated Notes?
The most common use of this Notes is found in situations where a company is on the verge of bankruptcy, is running at a loss or is about to issue a financial restructuring. Another possible scenario can be when a promoter issues a this notes to a real estate project in the form of a senior debt, where his loans will be paid out first followed by those of other stakeholders.
In the event that the company actually goes bankrupt, the remaining funds of the company will be used to first settle the senior debt and only then will be used to settle the subordinated loans.
Inclusions in Subordinated Notes
- Parties Involved: There are two parties involved; the first being the lender or group of lenders who are issuing the subordinate note, and the second being the company who is being issued the note.
- Effective Dates: This legal document contains the dates of importance such as when the note will be issued, when does the senior debt needs to be cleared and other important details.
- Where does it Apply: This is legally binding within the boundaries of the state, county or city it was originally issued at.
How to Draft Subordinated Notes?
Follow the mentioned below steps in order to draw Subordinated Notes.
- Organize a meeting between both the parties and discuss about the terms and conditions of the subordinate note being issued, the important dates and the amount of the senior debt.
- Once both the parties have agreed to the terms and conditions, reach out to a legal team and ask them to draft a Subordinated Notes on your organization’s behalf.
- Cross verify and check the details with both the parties and file the contract in the local court of law as advised by your legal team.
Benefits of Subordinated Notes
The benefits of having Subordinated Notes are as follows.
The presence of a subordinate note gives a guarantee to the lenders that no matter what might be the circumstance, their debt will be paid in full.
The Subordinated Notes is a legal proof that a transaction has taken place between both the parties and thus it can be produced in court, if there is a need for the same.
In the absence of a Subordinated Notes, both the parties won’t have a legal proof of a transaction taking place between them and thus in the case of a conflict, both of them will stand a chance to lose.
Key Terms & Clauses in Subordinated Notes
- Notices: Before Subordinated Notes can be issued, there are certain notices that need to be issued and this section contains the details of the same.
- Disclaimers: Both the stakeholders need to issue certain disclaimers and guarantees before, during and after such a contract is created and this section outlines the details of the same.
- Remedies: In the event of a lapse in payment or default in terms and conditions, certain remedies come into action, the details of which are enclosed in this section.
- Obligations: Both the parties have certain obligations that need to be fulfilled before such a contract can be issued and this section contains the details of the same.
Download Subordinated Notes
A sample of the agreement can be downloaded from below.
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