Subordinated loan is a type of a loan that receives a lower priority level in terms of its claim to the debtor’s (Project Owner‘s) assets in the event of the debtor’s (Project Owner’s) bankruptcy or liquidation. This means that if the debtor (Project Owner) defaults on his debts arising out of the loan provided by the creditor (Funder), such debts shall have the lowest seniority in the hierarchy of other outstanding debt claims of the debtor (Project Owner) and thus such debts shall be repaid to the creditor (Funder) only after other primary debts have been paid. That is, once all of the unsubordinated debt holders receive payment, the subordinated loan issuers (Funders) are next in line.

The laws implicate the following key features of subordinated loan: 1) subordinated loan shall be provided in the monetary form; 2) the lender (Funder) undertakes not to require the borrower (Project Owner) to repay the loan (including interests and other payable fees) before the repayment term specified in the loan agreement; 3) in the event of liquidation or bankruptcy of the borrower (Project Owner), the lender's (Funder’s) claim under the loan agreement will be satisfied only after the claims of other creditors of the borrower (Project Owner) have been entirely satisfied.

Since subordinated loan has a lower level of priority when it comes to the debtor’s (Project Owner‘s) repayment obligation, it is riskier than unsubordinated (regular) loan, because creditors (Funders) face a risk of getting paid back only a fraction of a loan provided (including interests and other payable fees) as well as the risk of not being paid back the loan (including interests and other payable fees) at all. As subordinated loan is of a lower priority, in the event of debtor’s (Project Owner’s) financial difficulties, the repayment of loan provided (including interests and other payable fees) may be delayed and may not meet the repayment schedule agreed upon under the loan agreement due to other outstanding debtor’s (Project Owner’s) obligations that hold a primary status.

Therefore, each Funder shall make an independent thorough assessment if such type of loan and associated risks meet Funder’s expectations and financial capabilities. In case the Funder cannot make such informed assessment on its own, it is highly advisable to refer to external advisors who could help to evaluate if such investment under subordinated loan type is suitable for the Funder specifically and if it is not too risky, taken into consideration the risk appetite, financial sustainability and other relevant factors of the Funder.
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