This article provides general information only and is not legal advice for any specific case. Regulations may change – please consult a professional before acting.
In layered financings – acquisition debt, project finance, restructurings and mezzanine rounds – the distinction between senior and subordinated creditors decides who gets paid first when a borrower fails. Here is how the concepts work, and how they play out under Vietnamese law.
What Is Subordinated Debt?
Subordinated (junior) debt is a loan or bond that ranks behind senior obligations in the queue for a borrower’s assets and earnings. If the borrower defaults or is liquidated, subordinated creditors recover only after senior creditors have been paid in full – and may recover partially or not at all. To compensate for that risk, subordinated debt carries higher interest. It still ranks ahead of preference and ordinary shareholders.
Senior Debt: Priority and Pricing
Senior debt sits at the top of the repayment order, usually secured, and therefore prices lowest. Banks typically occupy this layer: their deposit-funded cost base and regulatory expectations favour lower-risk positions. Subordinated layers are filled by mezzanine lenders, bondholders and junior tranches of structured products – investors paid to absorb the next slice of risk.
How Subordination Is Created in Vietnam
Vietnamese law does not use a single “subordination” statute; ranking is built from several sources:
- Security and registration: under the Civil Code 2015 and secured-transaction regulations, a registered security interest generally takes priority from its registration time – making perfected senior security the strongest layer;
- Bankruptcy distribution order: the Bankruptcy Law 2014 fixes the statutory waterfall (bankruptcy costs, employee claims, certain post-filing debts, then unsecured creditors) – secured creditors enforce against their collateral first;
- Contractual subordination: intercreditor and subordination agreements rank creditors between themselves – payment blockages, standstills and turnover clauses must be drafted carefully to be enforceable in a Vietnamese context;
- Structural subordination: lenders to a holding company are structurally junior to creditors of its operating subsidiaries – a point often missed in offshore-onshore lending structures.
Why It Matters in Practice
- For lenders: assess the borrower’s full debt stack and existing security registrations before committing – seniority on paper means little if collateral is already encumbered;
- For borrowers: mezzanine and subordinated tranches expand borrowing capacity without diluting equity, at a price;
- For investors in bonds: under the amended Securities Law, privately placed bonds sold to individual professional investors must carry credit ratings and security or guarantees from 2026 – ranking disclosure is becoming unavoidable;
- In banking: subordinated instruments remain a familiar tool for credit institutions to qualify as Tier 2 capital under State Bank regulations.
In our restructuring practice – including debt-for-equity swaps and multi-party settlements – the enforceability of the ranking, not the interest rate, is usually what determines each creditor’s real outcome.
Structuring a financing with multiple creditor layers?
Our Banking & Finance team drafts facility, security and intercreditor documentation that holds up when it matters. Contact us for a confidential discussion.
