What do subordinated debentures signify in terms of claim priority?

Subordinated debentures are a specific type of debt instrument that carry a lower claim in the event of liquidation or insolvency compared to other types of debt, primarily senior debt. This means that in the hierarchy of claims during a liquidation process, holders of subordinated debentures will be paid after the senior debtholders have been satisfied. The use of the term "subordinated" itself indicates that these debentures are subordinate in terms of their claim priority.

In practical terms, if a company faces financial difficulty and is liquidated, senior debt obligations must be fulfilled before any payments are made to subordinated debenture holders. This increased risk for subordinated debenture holders is why these financial instruments typically offer higher interest rates compared to senior debt, compensating investors for taking on this additional risk. Thus, the characterization of subordinated debentures as having a lower claim in insolvency is fundamentally accurate, reflecting their position within the capital structure of a company.