How subordinated debt factors in
Subordinated debt is a liability that has lower priority than other debt. One example is a second mortgage on a home. The lender on a second mortgage typically has the right to repayment from the proceeds of the sale of the home, but the lender on the first mortgage must be repaid in full before the second-mortgage holder can receive payment.
In some cases, subordinated debt holders have the right to make claims against other property. When that's the case, it makes sense to count subordinated debt in the tangible net worth calculation. However, subordinated debt holders sometimes have no recourse against other assets. If the value of the asset is insufficient to pay off the subordinated debt, then the debt holder can be left without any legal rights. Then, it might makes sense not to count the subordinated debt fully against your tangible net worth, because it effectively has no rights to full repayment based on current values.
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