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Contractual Subordination

A subordination of mezzanine capital whereby a lender contractually agrees to be subordinated to another. A borrower effectuates this though the registration of first-priority claims such as liens, mortgage loans, or pledges of security over the its real assets in favor of the senior lenders. This is conventionally negotiated in subordination agreements and intercreditor agreements. For example, the interaction of the rights of mezzanine and senior lenders is typically governed by an intercreditor agreement. A subordinated lender is paid more interest than the senior lender due to the greater amount of repayment risk the former is exposed to.


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