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What is Junior Debt?

March 12, 2012

When you deal with loans and debts most of the time, terms such as senior debt and junior debt are certainly familiar. For those of you who don’t know what a junior debt is, we are going to discuss this type of loan in this article.

Junior debt is a phrase used to describe a subordinated debt. It is basically a debt with lower priority rating compared to other conventional debts; the conventional debts issued by financial institutions, on the other hand, are recognized as senior debts with higher priority ratings.

As the name suggests, junior debt comes with several differences compared to senior debts. For example, if the borrower goes bankrupt, junior debts don’t get settled until all primary obligations are settled. The junior debt lenders – or, in most cases, investors – will have to wait until all other primary obligations are fulfilled before they can claim their investments back.

Although junior debt is a form of loan, it is usually issued as a bond or a commercial paper depending on the term attached to the loan agreement. Before a company or individual can apply for a junior debt, it needs to provide proper collateral – usually against cash flow or existing loans. A proper subordination agreement must also be formulated.

For investors and lenders, junior debts can actually be highly beneficial. Since there are more risks to take on, it is quite natural that junior debts come with higher interest rate. This means you can earn higher return on investment using this particular high-yield investment option.

Let’s not forget that there are also junior debts with relatively short loan period. The shorter the term, the lower risk a junior debt has. If you are relatively new to private investing and you want to invest by giving junior debts, it is always best to start with shorter loan period.

Do I qualify for an IVA?

April 26, 2012

 

An IVA – the common term for an 'Individual Voluntary Arrangement' – is a form of insolvency solution, available in England, Wales and Northern Ireland.

An IVA can help people who qualify repay whatever they can afford towards their unsecured debts for an agreed time period – and once they've done that, their lenders will write off whatever part of the debt they can't afford to repay.

But could an IVA be suitable for you? Keep reading to find out.

Could an IVA be suitable for me?

An IVA (Individual Voluntary Arrangement) could be suitable if:

  1. You have a significant amount of unsecured debt,

  2. You can't afford to repay everything you owe in a reasonable amount of time, but

  3. You can afford to make monthly contributions into an IVA for five years.

A professional debt adviser could discuss your finances with you and help you work out if you may qualify for an IVA. And even if an IVA isn't suitable, they could help you find an approach that fits your situation.

How does an IVA work?

Once an IVA is agreed with your unsecured lenders, you will:

  • Make one, reduced payment every month, based on what you can afford to repay after your basic costs have been covered

  • Stop any further action from your unsecured lenders

  • Have whatever remaining debt you can't afford to repay written off once your IVA has successfully ended – in the majority of cases, after 5 years.

An IVA will affect your credit rating (for six years from the day it starts), and if you're a homeowner, you may have to release some equity (in the 54th month of the agreement).

How could I set up an IVA?

An Insolvency Practitioner (IP) is required to set up an IVA. If you decide to enter an IVA, the IP will discuss your finances with you and draw up an IVA 'proposal' with you – a document showing your lenders why an IVA would be suitable for you, looking at how much you can afford to repay, how much unsecured debt you have in total, etc.

As long as enough of your lenders agree to it, your IVA will then go ahead.

The Differences between Subordinated Debt and Normal Debt

February 10, 2012

Now that we have discussed different aspects of a subordinated debt before, from the basic principles behind this type of loan to the more specific details of the subordinated debt agreement. In this part, we are going to take a look at subordinated debts and compare them against normal debts issued by banks and financial institutions. Let’s get started, shall we?

The main difference between a subordinated debt and a normal debt is their level of priority. A normal debt is categorized as primary – or also known as a senior debt – and will be paid first if the borrower goes into bankruptcy. A subordinated debt, on the other hand, is categorizes as secondary. This is why subordinated debts are known as junior debts. As expected, investors and lenders will have to wait until all primary obligations are fulfilled before they can claim their investments back.

Although a subordinated debt might seem like a risky investment to make, it is not without benefits. Compared to a normal debt, a subordinated debt offers a substantially higher interest rate. This means the return on your investment will be substantially higher as well.

Depending on the form of subordinated debt the borrower is using, the term attached to a subordinated debt is usually shorter compared to that of a normal debt. Pair the shorter term with higher yield, and you have one solid money making opportunity to engage.

A normal debt is usually difficult to take out, especially if you already have other primary debts just months away from maturing. A subordinated debt, however, is designed specifically for this type of situation. If you have a primary loan that you need to repay soon, considering a subordinated debt as a payment solution can be the best way to go. You may have to cope with the higher interest rate, but you can maintain your credit rating as well as your business’s growth and smooth operations.

What is a Subordinated Bond?

January 9, 2012

A company or business venture can take out a subordinated loan from banks, other financial institutions, or venture capitalists and individual investor using different methods. Bonds, however, remains the most popular one among investors. What is a subordinated bond exactly? That is what we are going to find out in this article.

A subordinated bond can be either a publicly traded bond or a private bond issued by the borrower. Since the bond is issued as a secondary loan, it still carries all the common natures of a subordinated loan. This means that when an investor buys a subordinated bond, he cannot claim a reimbursement before the company’s other primary obligations are fulfilled in the event of bankruptcy.

When the subordinated bond is traded publicly, it can also be used as a research tool. Banks and larger financial institutions often release publicly traded subordinated bonds to see how the market reacts to certain level of yield, potential profit, or interest rate. This helps them analyze the state of the market while at the same time collect funds for future developments.

The one thing you need to keep in mind when investing in subordinated bonds is that the prices of the subordinated bonds change if base interest rates or the average credit risk changes. You can use this understanding to manage your risks by monitoring the market state closely as you invest your money in a subordinated bond.

The good news is, subordinated bonds offer substantially higher yield compared to standard bonds. Since you are taking on more risks, the potential return will also be higher. Plus, subordinated bonds usually come with a shorter term after which it will mature and you can receive your investments back.

Just like other investment opportunities, subordinated bonds offer a balanced risk and return, making it one of the most profitable investment opportunity to take on.

What is a Subordinated Loan?

December 11, 2011

We’ve talked about subordinated debts in the previous article, covering some of the basics and understanding the principles behind this type of debt. In this part, we are going to talk about subordinated loans and look further into the benefits and advantages this type of loan is offering to investors and borrowers.

Subordinated loan is a secondary loan issued with less importance. If a company takes out a subordinated loan while still having primary loans in their statements, then the subordinated loan will be paid after all other obligations are fulfilled in the event of a bankruptcy.

For corporations, subordinated loan is a useful financial tool to use, especially when quick financing is needed. Most of the time large corporations try their best to avoid taking out a subordinated loan. However, the company may need additional funding to expand or another loan to pay for the existing one as it matures; in any of these cases, subordinated loan is always the best source of financing to use.

From the investors’ point of view, subordinated loan is a high yield – high risk investment instrument that is always profitable to use, especially when proper calculations are done prior to investing. Keep in mind that only less than 5% of the companies that use subordinated loan goes bankrupt, which means with careful planning there are a lot of profits to be made from buying subordinated bonds.

Even the government is using subordinated loan to finance the community projects. Large infrastructure projects cost a lot, and subordinated loans with longer terms are often used to fund the project. If you are looking for a relatively safe investment opportunity with high yield, government-issued subordinated bonds are the ones you need to look into.

There are still a lot to discuss about subordinated loans, but we are going to save them for future articles.

What is Subordinated Debt?

November 18, 2011

We all know that there are different types of debts on the market. Some debts are designed for private customers, while other are intended for commercial corporations and ventures. A subordinated debt, the kind of debt we are going to discuss in this article, is a commercial debt used by corporations and enterprises to generate the funds they need to expand.

To put it in simple words, a subordinated debt is a debt that is rated less than primary debts. If a company takes out a subordinated debt and it goes bankrupt, all other financial obligations – including taxes and obligations to stakeholders – are paid first before the subordinated debt.

As the name suggests, a subordinated debt is a secondary debt by nature. It is not prioritized in terms of payment in the even of a bankruptcy, so this kind of debt does carry more risks compared to conventional types of loans. However, banks, financial institutions, and even individuals are still interested in giving subordinated loans to corporations.

The main reason why subordinated debts are still very popular on the market is because of the higher yield. Since lenders carry more risks, the subordinated loans usually come with a higher interest rate compared to the base market interest rate. This means lenders get compensated for the extra risks they are taking on.

A subordinated debt is also known as junior debt, while primary loans are known as senior debts. It is also quite common for banks to give subordinated loans not only as an investment but also as a tool for measuring the state of the market; banks can then see the primary and secondary prices of subordinated debt certificates when they are out on the market.

Those are the basics of subordinated debt. Stay tuned for more resources because we are going to discuss about other aspects of subordinated debts right here on this site.