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Subordinated Debt: To Issue or to invest, that is the question.

By Tom Slefinger, Senior Vice President, Institutional Fixed Income Sales, Alloya Investment Services


Since the mid-1990s, low-income designated credit unions have been able to access secondary capital as an option to strengthen their balance sheet and net worth while providing the flexibility to grow and attain strategic goals.

On January 1, 2022, NCUA adopted a new rule that expanded the pool of credit unions eligible to access secondary capital by issuing subordinated debt. Now, larger credit unions (>$500 million) may issue, even if they do not have low-income status. However, there are differences in the way this debt instrument contributes to net worth or risk-based capital.

What is it?

Subordinated debt is a borrowing vehicle with loan and term structures that gain favorable regulatory capital treatment. It is considered a “security” and has other legal ramifications.

Why issue?

Subordinated debt helps credit unions maintain or build regulatory capital for a variety of reasons.

  1. Growth: Organic growth, mergers and bank acquisitions, opening new branches, entering new markets, and expanding products and services.
  2. Backfill capital: Due to strong growth over the past two years, credit unions have been under heightened capital pressure.
  3. Enhance regulatory capital: New risk-based capital rules may require credit unions to add additional capital to comply with NCUA guidelines.
  4. Other: Help alleviate concentration risks or offset potential adverse economic cycles or asset losses in the future.

The bottom line: It is important to understand this tool and, at the very least, consider it when building current or future strategic plans.

Your feedback is valued!

Alloya recently developed a Subordinated Debt Program to meet the issuance and investment needs of credit unions. Please take a few minutes to read this article and then complete our brief survey. Your feedback will assist Alloya and Alloya Investment Services in determining the interest levels in our program (issuance or investment) and help us better serve our members and clients.

How does it work?

The first step is to educate senior management and the board of directors and discuss whether the credit union should consider issuing now or in the future.

Regulatory approval is required (state and/or NCUA) before issuing. Developing the plan and application, then receiving the approval can be a lengthy process (3-4 months). If approved, credit unions have two years to issue.

The issuance process requires specific documents, including policies, offering documents, note/purchase agreement and other filings that must be approved by an attorney specializing in securities. These must be sold by registered securities personnel associated with a broker/dealer.

What is the typical structure of a subordinated debt offering?

Most issuances are a 10-year final maturity, but callable in five years on a 20% annual pro rata basis, as the capital treatment declines by that amount each year during that time period.

Interest rates will be fixed for the full maturity or fixed-to-float (e.g., fixed for five years and floating the remainder of the term).

Who will buy it?

While providing significant benefits to issuers, subordinated debt also presents a strong alternative investment. One credit union’s recent subordinated debt offering of $50 million was 2x oversubscribed for a 10-year fixed rate note. We anticipate most of these offerings will be priced 200+ basis points over a comparable WAL Treasury yield.

This investment has inherent credit risk since it is unsecured and subordinate to all claims should the credit union issuer fail. It’s also likely to have less liquidity than traditional marketable securities. As such, each issuance should be reviewed carefully before purchasing. However, investors that purchase have the potential to earn significantly higher yield premiums when compared to traditional Treasury, agency, bank notes, corporate debt and even mortgage-backed securities.

What is required?

If a credit union deems an investment in subordinated debt to be suitable and risk appropriate, the first step is to update the credit union’s investment policy and gain approval from the board of directors. The policy should include the following:

  1. The aggregate amount the credit union can invest in subordinated debt (25% of net worth max)
  2. The individual amount in any one originator (15% of net worth max)
  3. The due diligence that the credit union will perform on the issuing credit union
  4. The board review and approval of each respective purchase of a subordinated debt issuance


Subordinated debt can be an effective means of enhancing capital for various strategic reasons. It can also be used as an alternative investment to earn additional yield and better diversify the investment portfolio while in turn helping the overall credit union industry.

Whether a credit union decides to issue or invest, it’s important to note that they cannot do both at the same time. For example, if a credit union issues subordinated debt, they will be unable to invest as long as they have issuances outstanding. Conversely, if a credit union invests in subordinated debt, they will not be able to issue while holding the investment.

For more information about our Subordinated Debt Program, please contact your Alloya Investment Services representative or visit

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