Subordinated Bonds and the Fulfilment of Their Obligations in the Event of State Aid

Abstract

A bond is a debt security, under which its issuer undertakes to repay to the bondholder the principal of the bond and the interest (the coupon) at a specified point in time, which is to be considered as the redemption of bonds. Bonds have several types: bonds issued by the public sector, bonds issued by capital companies, publicly available bonds, private bonds, convertible bonds, contingent convertible (CoCo) bonds, exchangeable bonds, exchange bonds, callable bonds, subordinated bonds, etc. In economic circulation, subordinated bonds are widespread securities. The subordinated obligation in the bond distinguishes the subordinated bond from other bonds. At the same time, the underlying relationship entails significant risks for the fulfilment of the obligations arising from the bond, which is outweighed by the higher profitability of such bonds. However, there are cases where the obligations arising from subordinated bonds are never met. Such cases may be based not only on the insolvency of the issuer of the subordinated bonds but also on the existence of State aid received by the issuer. In view of the recent financial difficulties of several banks, the likelihood of an issuer that has received State aid being able to meet its obligations under subordinated bonds becomes a particularly acute matter.