Subordinated Debt

finance a la shmoop what are secured bonds versus unsecured bonds and

debentures okay so that's an insecure bond but we're talking about here is an [Insecure bond hiding under the sheets]

unsecured bond what is an unsecured bond well this is that was an unsecured bond

old school like 15 century old school it was just a handshake one guy promised to [People shake hands]

pay back another 400 pounds of barley in return for three sheep next year or

something like that and the sheep were the payment form not the guarantee and

the bond was loan emic bond ursins word in fact the promise to pay was secured

but by his word or commitment to repay the loans kind of old school debenture

unsecured bonds work similarly today corporations sell debentures to Wall [Corporations sending debentures to Wall St]

Street all the time debenture being a fancy word for an

unsecured bond it's just debt that the company promises [Definition of debenture]

to pay back well if they don't then oh well and yes the debenture holders could

in theory then take ownership of the equity of the company but in reality [Debenture holders take the majority of the company equity pie chart]

unsecured bonds when not paid back almost always mean the death of the CEOs

career and likely also of the careers of all the other members of the management [Gravestones for the management board]

team so while unsecured bonds are notionally more risky than secured bonds

well this issue hasn't been tested all that often in real life okay so if

that's an unsecured bond what's a secured bond well it's one that

is secured by a specific asset or value or other stores of wealth which get [Definition of secured bonds]

forfeited if the lendee doesn't pay back the lender on time and in accord with

the terms of the debt deal example the dung and the restless' is a company that [Sign for 'The Dung and the Restless']

makes fertilizer by collecting old political speeches and grinding them up [Speeches going into the grinding machine]

selling them to farmers in the Midwest you know for a coin but they also own a [Tractor spraying crops]

pork farm which is kind of separate from their main fertilizer biz they need [Hogs Gone Wild logo appears]

money to build a bigger grinder because politicians are giving more speeches

these days you the internet and all that and they [Politician being applauded]

pledged their pork farm as collateral behind that secured bond offering that [Collateral sign on the pork farm]

is if they don't pay back the bond interest and principle on time then they

lose the pork farm to the lenders yeah and that would be a pig mistake... [Guy snorts like a pig]