Structural subordination
Debt at a parent ranking behind the creditors of the subsidiary that owns the assets, because the parent holds only its equity.
Where you will meet it
Structural subordination appears in 2 learning outcomes on the CFA syllabus. A few of them:
- Explain credit ratings, notching and where ratings fall short
“Notching adjusts an individual issue up or down from the issuer rating to reflect its seniority and any structural subordination — debt at an operating subsidiary ranks ahead of debt at a holding company whose only asset is the subsidiary's equity.”
- Contrast credit analysis of high yield issuers with that of investment grade ones
“Analysts examine the capital structure in detail, because structural subordination determines recovery, and they model recovery explicitly rather than treating it as a constant.”
Practise it
Practise structural subordination until it is automatic: questions that explain every wrong option.
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