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In this episode of Wall Street Words, Todd Alt explains the concept of a subordination agreement. This agreement involves creditors and is crucial for senior creditors allowing a company to borrow additional funds. It ensures the new lender is aware that their loan is subordinate to existing loans. Subordination agreements are vital for establishing the priority of claims in cases of liquidation or bankruptcy, determining who gets paid first. Understanding the capital structure and one's position in terms of subordination is essential when lending to a company. Alt emphasizes that these agreements, though complex, are common and important financial instruments.
