Subordination is the ranking of one claim behind another in the order of payment, so the junior holder is paid only after the senior claim is satisfied in full. It determines who bears a shortfall first.
In a waterfall, senior debt is paid ahead of subordinate debt and equity. Subordinated capital earns a higher return because it absorbs losses earlier. In a single matter, liens and prior advances create the same ordering on the proceeds.
The ranking has to be mapped before a position is priced. A funder behind several liens can have a large nominal claim and a small expected recovery.
Subordination is not a statement about the quality of the underlying matter. It is a statement about priority.
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