Subordinated Debt & Equity

By: Sumex Business Financing  09-12-2011
Keywords: financing, Subordinated Debt

Subordinated Debt & Equity

Equity (or sub-debt) investment in a private company is the most risky type of financing and therefore can be difficult to obtain. With this kind of financing, the primary security of a company is often pledged to other lenders – therefore the greater risk. Consequently, the rate of return that an investor negotiates for an investment of this type is usually higher than for other investment types. With the banking, financial management, business management, and personal networks that the Sumex team at Sumex has, we Sumex will find more ways to Yes! 

SUBORDINATED DEBT

Sub-debt is often referred to as mezzanine financing.  This type of financing occupies a location on the balance sheet of a company between senior debt and equity. It can be viewed as a hybrid form of capital, combining elements of both debt and equity. It most commonly takes the form of subordinated debt coupled with warrants that enable the investor to purchase shares in a company at a predetermined price. It is not a control investment and is normally not used to take an ownership position in a company. The subordinated debt, or "sub debt", has all the characteristics of other debt instruments, but is structurally junior in priority of payment and its claim on collateral to senior debt. Because of this subordinate position, sub debt presents a greater risk profile to the lender and, thus, warrants a higher rate of return. The warrant position that accompanies the subordinated debt is known as the "equity kicker" and is structured to provide an additional return to the investor. Unlike the debt component, this portion of the total return to investors does not come in the form of periodic payments of interest, but through the projected increase in the equity value of a company.

EQUITY

Equity investment includes the acquiring of common or preferred shares or a contractual right to acquire shares of one type or another. The contractual rights often are provided in the form of warrants, options or debentures and most often used either to increase the return of an investment or reduce risk. Sumex has a network of investors interested in considering equity investments. The Sumex team will assess an opportunity and advise its clients in order to maximize their potential return, whether it be to acquire an equity interest or to sell one. 

Keywords: financing, Subordinated Debt

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