Subordinated debt is paid after the other creditors in an insolvency proceeding, by agreement or by law. Mezzanine debt is the tranche between senior debt and equity: it is usually subordinated to the bank, costs more than the bank debt and less than equity, and often participates in the project's success.
Subordinated and mezzanine are not synonyms
They are used as if they were, but they answer different questions:
- Subordinated describes a payment ranking. It is a legal concept: it says where a creditor gets paid when there is not enough for everyone.
- Mezzanine describes a position in the capital structure. It is a financial concept: the money that completes what neither the bank nor the shareholders cover. It usually combines a cash interest, an interest that is capitalized and paid at maturity and, sometimes, a participation in the upside (share options, conversion or a percentage of profit). Repayment is usually a single payment at the end.
A mezzanine loan is almost always subordinated to senior debt, but not always to all creditors. That difference, which seems minor, changes its treatment in an insolvency proceeding.
Where each creditor gets paid in an insolvency proceeding
The consolidated text of the Ley Concursal (Real Decreto Legislativo 1/2020, amended by Ley 16/2022) classifies insolvency claims into privileged, ordinary and subordinated (art. 269). The order of payment in liquidation is as follows:
| Order | Claims | How they get paid |
|---|---|---|
| 1 | Claims against the estate (especially those arising after the declaration of insolvency, such as its own costs, and certain earlier ones that the law raises to this category, art. 242) | They are paid before insolvency claims, against assets not subject to a special privilege (arts. 429 and 432.1); what is obtained from a mortgaged or pledged asset goes first to its secured creditor (art. 430.3) |
| 2 | Special privilege: mortgage, pledge and other security interests | With what is obtained from the affected asset; any shortfall passes to its class (art. 430) |
| 3 | General privilege (art. 280) | With the remainder of the estate, in its legal order (art. 432) |
| 4 | Ordinary | Pro rata, once the previous ones have been paid (art. 433) |
| 5 | Subordinated (art. 281) | Only when ordinary creditors have been paid in full, in the order of art. 281 and pro rata within each class (art. 435) |
| 6 | Shareholders | They receive any surplus, if there is one |
From the list of subordinated claims in article 281, three cases matter to anyone financing a company:
- Contractual subordination (art. 281.1.2.º): claims that by contract are subordinated «with respect to all other claims», including participating loans.
- Interest (art. 281.1.3.º): interest and surcharges are subordinated, except those on claims secured by a security interest up to the extent of the security.
- Specially related persons (art. 281.1.5.º and art. 283): loans, and acts with a similar purpose, from shareholders who when the claim arises hold, directly or indirectly, at least 10% of the capital (5% if the company has securities admitted to trading on an official secondary market) are subordinated by law, whatever they are called. Group companies have all their claims subordinated. This is common in developments: the developer who lends to its vehicle company is, in insolvency proceedings, a subordinated creditor.
The mezzanine nuance. If the lender subordinates itself only to the bank, and not to all creditors, its claim does not fit article 281.1.2.º: in insolvency it will be ordinary. It will only be privileged if it has a security interest over the debtor's own assets; a pledge over the shares of the vehicle company granted by the shareholder does not give it privilege in the vehicle's insolvency. Its interest will be subordinated except that covered by the security interest (art. 281.1.3.º), and the entire claim will become subordinated if the lender is a specially related person to the debtor: a shareholder with at least 10% of the capital when the claim arises (5% if the company has securities admitted to trading), a group company or a de facto director (arts. 281.1.5.º and 283). Since the 2022 reform, article 435.3 recognizes the relative subordination agreement between creditors provided that the debtor is a party and it does not harm third parties, and the insolvency administration pays according to it. That is why the agreement between creditors (intercreditor) is as important as the loan.
The participating loan has its own rule: it ranks after ordinary creditors and counts as equity for capital reduction and liquidation purposes (art. 20 of Real Decreto-ley 7/1996). It is subordinated debt that also improves the balance sheet.
What it is used for: real estate developments and SMEs
In a real estate development, the typical structure has three layers: the developer's equity (often the land already paid for), the developer loan as senior debt with a mortgage and presales, and a gap between the two. Subordinated or mezzanine debt covers that gap and reduces the capital the developer has to contribute. It is usually secured by a pledge over the shares of the vehicle company or a second-ranking mortgage, and it requires the bank's consent, whose contract normally limits additional borrowing.
In an SME, it appears when bank debt has reached the limit of its ratios and the company does not want to dilute itself: growth, acquisition of another company or refinancing. In Spain, ENISA participating loans are the public version of this financing, and in startups with recurring revenue venture debt plays a similar role.
How much it costs compared with senior debt and equity
| Aspect | Senior debt | Subordinated / mezzanine | Equity |
|---|---|---|---|
| Payment priority | First, secured | Behind senior (and behind all ordinary creditors if subordinated within the meaning of art. 281: by agreement vis-à-vis all or by law) | Last |
| Remuneration | Fixed or variable interest | Higher interest, partly capitalizable, possible participation in the upside | Dividends and capital gains, uncapped |
| Relative cost | The lowest | Intermediate | The highest |
| Control and dilution | No dilution, with agreed financial obligations | No dilution or limited dilution; stricter obligations | Dilution and voting rights |
| Tax treatment | Financial expenses deductible with the combined limit of art. 16 of the Ley del Impuesto sobre Sociedades: net financial expenses are deductible up to 30 % of operating profit, with 1 million euros deductible in any case, and the excess can be deducted in subsequent years; if the debt finances the acquisition of a company, the limit of art. 16.5 also applies, and with shareholders or group companies the interest must be agreed at market value (art. 18). The remuneration of participating loans between group companies is not deductible for the payer (art. 15.a) and is exempt dividend for the lender (art. 21.2) | Non-deductible dividends | |
We do not give rate ranges: they depend on the project, the term, the guarantees and the market at each moment. The logic is stable. Mezzanine is expensive as debt and cheap as equity, and it pays off when the project yields more than that tranche costs and the developer or the shareholders want to preserve their stake.
From subordinated loan to tokenized bond
The subordinated tranche does not have to come from a single fund. A company can issue subordinated bonds and place them with several investors. The Ley de Sociedades de Capital does not set an amount limit for the public limited company; the private limited company cannot issue more than twice its equity, except with a mortgage, pledge of securities, public guarantee or joint and several guarantee from a credit institution, and never convertible bonds (art. 401).
That bond can be issued in token format, as explained in the guide on tokenized bonds for SMEs. It is a transferable security registered by an ERIR under article 8 of the Ley 6/2023 and outside MiCA because it is a financial instrument. The smart contract can automate the payment schedule and the register of holders, but it does not alter the ranking: in an insolvency proceeding the Ley Concursal governs and so does what the issuance document says, which must explain the subordination clearly. To place it with the public, the prospectus exemption reaches up to 12 million euros from 5 June 2026, and above that a prospectus is required (we detail it in debt and bond tokenization).
Are you missing a tranche between the bank loan and the project equity? Take the issuance diagnosis (2 min) or request a proposal.
This content is informative and educational. It does not constitute legal, tax, or investment advice. Check the current version of each regulation in the BOE and on EUR-Lex.
HokenFi is a software and infrastructure provider; it does not provide regulated services (CASP, ESI, EAF, or ERIR). This article is informative and does not constitute financial or legal advice.
Frequently asked questions
What is subordinated debt?
It is debt that is paid after ordinary creditors if the company enters insolvency proceedings. It can be so by agreement, when the contract subordinates it to all other claims, or by law, such as interest or shareholder loans with at least 10 % of capital (5 % if the company has securities admitted to trading) when they were granted. In Spain it is regulated by article 281 of the consolidated text of the Ley Concursal.
What is the difference between senior debt and subordinated debt?
Senior debt is paid first, normally with security interest, and for that reason it is the cheapest. Subordinated debt is paid after the senior debt, or after all ordinary creditors if it is subordinated to all of them, by agreement or by law (art. 281 of the consolidated text of the Ley Concursal), and assumes more risk: it requires more interest and usually includes stricter obligations. Neither dilutes the shareholders, unlike equity.
What are subordinated bonds?
They are bonds that the company issues with the condition of being paid after other creditors. They allow a subordinated tranche to be distributed among many investors instead of negotiating it with a single lender. A public limited company can issue them without a legal amount limit; a private limited company, up to twice its equity unless guarantees are provided. They can be represented as tokens registered by an ERIR.
What is mezzanine financing?
It is a financing tranche between senior debt and equity. It combines cash interest, interest that is capitalized and, sometimes, a participation in the project's success. It is used to cover the gap left by the bank and the shareholders in developments, acquisitions or SME growth, normally without diluting shareholders, or diluting them less than a capital increase if it includes conversion or share options (convertible bonds can only be issued by a public limited company).
