Explain structural subordination and why it matters.
A core Restructuring interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
Structural subordination occurs when debt sits at different corporate levels. A subsidiary's creditors have priority over its assets, meaning that parent company creditors are structurally subordinated to subsidiary creditors. This matters because it increases the risk for parent company debt holders, as they cannot directly access subsidiary assets in a default scenario, potentially leading to lower recovery rates and higher credit spreads.
WHAT INTERVIEWERS LISTEN FOR
- ✓Debt at different corporate levels
- ✓Subsidiary creditors have priority over subsidiary assets
- ✓Parent creditors are structurally subordinated
- ✓Increases risk and lowers recovery for parent debt
COMMON MISTAKES
- ✗Confusing structural subordination with contractual subordination
- ✗Ignoring the impact on credit analysis and recovery rates
- ✗Assuming parent guarantees fully eliminate structural subordination
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