Subordinated Debt

What Are Subordinated Debt Instruments?

Subordinated Debt

If you wonder what the subordinated debt is, we can say that is an instrument that is a type of analysis without guarantee. Equity-like debt instruments are included in the equity calculation. The purpose of including these debt instruments in the equity calculation is to create additional resources and diversify the scoring resources. Equivalent debt instruments are defined as secondary debt. Subordinated debt instruments have a low priority in terms of repayment in case of default of the company.

What are the debt instruments to be included in the equity calculation? These debt instruments are called subordinated loans. There is a communique on subordinated loans to be added to the equity calculation of banks if the ratio of the capital adequacy of the bank falls below 5,125%, to be subjected to impairment and to be deleted from the records or converted into shares.

When debt instruments, which are subordinated loans added to equity accounts, are evaluated in terms of depreciation, deletion from the records, or converting into shares, they come before the debt instruments added to the contribution capital calculation. Subordinated debt is a type of debt that is considered less priority. The assets of a bankrupt company are first used to pay the unsecured debt. A secondary debt is collected for cash in excess of the non-refundable debt. If there is enough cash to repay it, subordinated debt is fully repaid by the debtors. However, it is also possible for subordinated debt holders to receive no payment or partial payment. In addition, subordinated debt and subordinated loans to be included in the main capital are debt instruments such as bonds and Eurobonds.

What is a subordinated Eurobond?

Eurobond is one of the subordinated debt instruments. Eurobonds are defined in US dollars. It pays coupons every 6 months. In addition, there is no transaction commission. The minimum transaction size is 200.000,00$. Subordinated debt instruments carry high risk. Since Eurobond carries high risk, it offers higher interest rates to its investors. Eurobond prices vary according to market conditions.

Persons with debts on subordinated debt are larger businesses and companies. In the case of subordinated debt, the debtor pays subordinated debt after paying other loans and corporate debts. Equivalent debt is secondary debt.  In case of default or bankruptcy, the person has secondary debt.

Converting to stock

It is mandatory to take a decision of the general assembly for the issuance of debt instruments to be added to the equity calculation by converting them into shares. In addition, preliminary permissions must be obtained from the relevant authorities for the issuance of the additional debt instruments that will be converted into shares, which are specified in the issue document or in the contract.  

Preliminary permission must be obtained to convert it into shares. What are pre-permits? Pre-authorization is the requirement that the bank has switched to the registered capital system. The registered capital system, if there is a provision in the articles of association of joint-stock companies, it allows capital increases in line with the decision of the board of directors, provided that they do not exceed the registered capital ceiling.

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