Subordinated debt, as the name
implies, is debt that is "junior" or "subordinated" or "farther back
in line" in payment than senior debt.
Consequently, subordinated debt carries a
higher risk for the issuer and consequently its issuers require a higher return on their
money.
However, the issuers of subordinated
debt are usually much more flexible in their terms than are the issuers of senior debt.
In fact, they often look like a combination of equity investors and lendors.
For instance, you can often structure your repayment terms to fit your cash flow schedule.
Or you might pay interest only for a period of time and then pay both interest and
principal.
The terms for
subordinated debt are almost always negotiable and
therefore it is imperative you know what to negotiate for and how to conduct the
negotiations. It is also imperative to find the right lendor in order to avoid a lot
of wasted time in the preliminaries.
Subordinated debt usually, but not
always, carries with it the right to purchase a certain amount of stock in your company at
a specific price sometime in the future [warrants].
The amount of stock and its
price is negotiable but generally centers around a predetermined Rate-of-Return or
Return-on-Investment that the issuer has determined is necessary to take a risk in lending
to your company.
Of course, you can negotiate that you can buy the warrants from the
issuer thereby providing the issuer a return on investment and you with no additional
shareholders.
One of the advantages of subordinated
debt is the issuer is virtually always someone who has intimate knowledge of your industry
and can bring more than money to the table.
The issuer usually serves in an
advisory capacity but is "hands off" the day-to-day activities. The issuer
usually becomes a "helper" in the development of your company and will often
assist in identifying expansion markets and customer bases as well as provide long term
strategic financial advice and assistance.
Most importantly, since the
subordinated debt issuer is a "partner", but not one who wants to assume
day-to-day activities in your business, there is less likelihood of the debt being called
as quickly as senior debt in times of cash flow difficulties.
A subordinated debt issuer's
primary goal is
to have your company grow and prosper. In difficult times, they will work
with you to get back on target or set new targets. However, they are lendors and not charities. Like you, they
will take action if things don't improve.
Because, like all things, the
possibility exists that the best laid plans may not materialize, it is important for you
to clearly understand and negotiate the terms of your agreement BEFORE you enter into the
agreement. It is also necessary for you to know and understand with whom you are
dealing BEFORE you start to deal with them.
Professional assistance and advice
from a firm that specializes in these matters and works on them everyday will help you,
your accountant and your attorney.
Capital
Markets Group, Inc.'s
knowledge of
these subordinated debt lendors' individual and specific criteria allows us to help you in
structuring realistic and preferential terms and value for your company.
We work
with buyers, lendors and investors throughout the world.
We have been doing this
since 1979 and our experience gives us the intimate knowledge of hundreds of professional
investors, lendors and buyers and allows us to provide you with the best alternatives to
reach a well thought out and executed solution.
