Definition

Subordination Clause is an agreement. Which states that the current claim on any debts will take priority over any other claims formed in other agreements made in the future. In finance, subordination refers to the order of priorities in claims for ownership or interest in various assets.

Explanation

Subordination clauses are most commonly seen in mortgage contracts and bond issue agreements. For example, if a company issues bonds in the market with a subordination clause. It ensures that if more bonds will issue in the future. The original bondholders will receive payment before the company pays all other debt issued after it.

This is additional protection for the original bondholders as the likelihood of them getting their investment back is higher with a subordination clause.