A subordinated loan is a rather simple catalytic instrument that can help to channel capitals towards impact enterprises. It can be incorporated into a capital structure or a hybrid of debt and equity 33 that ranks below senior debt but above common shares in the liquidity order of priority. The liquidity order determines who gets paid first in case of bankruptcy, and it follows a waterfall payment system, where senior lenders are the first to receive payments followed by the subordinated lenders if and only if the senior creditors have been fully paid back.

A subordinated loan together with the equity of an enterprise serves the role of the so called catalytic first-loss capital. The catalytic first-loss capital is a bundle of instruments that enables to improve the risk profile of an impact enterprise, thus mobilising greater amounts of capital towards addressing social challenges, and encouraging the flow of additional funding, in particular in the form of Senior Unsecured Loan and Senior Secured Loan.


Enabling the impact enterprise to access private capital

Can replace

Grants, equity, guarantees

Risk/Return Profile

Depends on individual case

Enterprise Lifecyle

All stages


Based on the funding need of an impact enterprise

Defining Criteria

It states the position in the distribution of payments in the event of liquidation or winding up of the company. A subordinated loan entitles the holder to receive payment prior to the shareholders but subsequent to all the other more senior creditors. In case of insufficient funds to pay the amount owned to subordinated loan holders in full, a pro rata percentage of the remaining assets or proceeds should be distributed.
Catalytic effect:
The catalytic nature of the instrument is of utmost importance. In fact, the final goal of the instrument shall be to cause the participation of investors who would not have participated, and mobilise volume of capital that otherwise would not have been obtained ("financial additionality").

Interesting Variants and Options

  • An equity co-investment could be incorporated with a subordinated debt to reduce even more of the risk associated with investing by other capital providers. In fact, equity is the most subordinate form of capital constituting the first layer to absorb losses.


  • The subordination can also be applied to the equity investment. By investing in the most junior form of equity, usually known as class C-shares, an investor can create a further layer to protect the other capital providers.


  • The subordination can be applied both on a transactional level and on a fund level. A fund level subordination implies that an investor is providing funds for the first-loss tranches in a structured fund, thus enabling the fund to mobilise larger investment volumes.


  • Linking financial rewards to the achievement of impact, for example reducing the interest rate.

Source: Innovative Financing Toolkit, BRIDDHI, 2020

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