Subordination refers to the ranking which different creditors have with regards to each other in terms of the priority or preference they have in receiving payments from a company. A subordinated borrower will typically only receive payments after the senior borrower has received any money owed to them. This subordination can take two forms. Structural subordination refers to subordination as a result of the respective place of creditors within a group's organizational structure.

The holding company within the group is the owner and shareholder of the group's operating subsidiaries. As a result, the holding company is subordinated to any debt holder of the operating subsidiary. In event of a liquidation, the value paid up from the operating subsidiaries to the holding company will amount to the value left over once the debt holders of those subsidiaries have all been paid in full. This means that the debt holders in the holding company can only be paid out with that remaining equity value in the operating subsidiaries, meaning that in effect, the debt holders of the holding company are subordinated to the debt holders of the operating subsidiaries. This subordination may not be clear to lenders of the holding company, but can be addressed with certain conditions within loan documentation of any money borrowed by the holding company.

Subordination can also take the form of contractual subordination where the subordination is documented within the contractual agreements within a single entity, with some lenders agreeing to be ranked lower in priority in the event of liquidation in return for higher interest rates. Other terms that may be found within loan documentation which will affect payments in the event of a liquidation include pari passu. Loans described as pari passu are on an equal footing with each other, meaning that distribution of any assets in a liquidation will be proportionate to the size of their outstanding amounts owed. Lien. A lien is a charge over a particular asset or group of assets of a company and allows for lenders who have that lien to have money owed to them paid through the sale of that asset in the event of default. There may be more than one lien on any one asset, but the money owed to the first lien holder must be fully satisfied before any remaining value is used to repay any second lien holder. Any remaining debt that has not been satisfied using the value of the specific asset will then rank pari passu with other senior debt. A negative pledge prevents the borrower from offering assets as collateral or security to any other lender if that would reduce the value of the security to existing lenders with a charge over that asset.