Credit rating and subordination - Explained

One-liner

A credit rating (from agencies like S&P, Moody's, Fitch) is just their read on how likely a company is to pay you back, based on public information. Subordination is where you stand in line to be paid if the company defaults.

In a default, the queue decides who gets paid. The back of the line is paid for the risk with a higher rate.

Why it matters

The same company does not issue every bond at the same risk. The rating shifts with the seniority of the debt and the maturity, so one issuer can carry both AAA and BBB paper at once. Secured debt is far safer than a clean, unsecured loan.

Analogy

In a default, creditors form a queue for whatever money is left. Sit near the front and you are more likely to be paid in full, which is exactly why senior debt usually pays a lower rate.

The catch

AAA does not mean the risk is tiny. It means that, on the public information analyzed, it looks tiny. Americanas in Brazil was rated AAA and then, on a fraud, defaulted overnight.