A subordinated bond is a debt instrument that ranks below senior debt in an issuer’s repayment priority if the issuer runs into financial difficulty, which is why subordinated bonds from Singapore banks and corporates typically offer a higher yield than senior bonds from the same issuer, to compensate investors for the extra risk.
Not financial advice. All figures for educational reference only. Data as at July 2026.
Last updated: July 2026.
Key Takeaways
- Subordinated bondholders are repaid after senior bondholders and other senior creditors, but generally still ahead of shareholders, if an issuer is wound up.
- Singapore’s three local banks, DBS, OCBC and UOB, regularly issue subordinated notes and Additional Tier 1 (AT1) perpetual capital securities as part of their regulatory capital structure.
- AT1 securities are a more extreme form of subordinated bond that can have their coupon cancelled or principal written down if the bank’s capital ratios fall below a trigger level, and are explicitly flagged as unsuitable for most retail investors.
- Because of the added risk, subordinated bonds typically carry a meaningfully higher coupon than senior unsecured bonds from the same issuer.
- Understanding where a bond sits in the capital structure matters more than the headline yield alone when comparing fixed income options.
What Is a Subordinated Bond?
When a company or bank issues debt, that debt is ranked in a specific order of priority for repayment if the issuer becomes insolvent. Senior secured debt is repaid first, followed by senior unsecured debt, then subordinated debt, and finally equity holders, who are repaid last, if at all. A subordinated bond sits below senior debt in this hierarchy, meaning subordinated bondholders only get repaid after senior creditors have been made whole.
Banks in particular issue subordinated debt as part of meeting regulatory capital requirements. Tier 2 subordinated notes and Additional Tier 1 (AT1) perpetual capital securities are two common forms issued by Singapore’s local banks, each serving a different layer of the bank’s regulatory capital buffer.
How Do Subordinated Bonds Work in Singapore?
DBS, OCBC and UOB periodically issue SGD-denominated subordinated notes and AT1 perpetual securities to institutional and, in some structured formats, retail-accessible markets. AT1 securities carry loss-absorption features: if the issuing bank’s capital ratios fall below a specified trigger, the issuer can cancel accrued distributions, and in a severe scenario, permanently write down part or all of the bond’s principal. This is a materially different risk profile from a standard senior bond, which does not carry this kind of loss-absorption mechanism.
| Debt Type | Repayment Priority | Typical Yield vs Senior Debt | Loss-Absorption Risk |
|---|---|---|---|
| Senior secured | Highest | Lowest | None |
| Senior unsecured | High | Baseline | Low |
| Subordinated (Tier 2) | Below senior debt | Higher | Moderate |
| AT1 perpetual | Near bottom, above equity | Highest | High, can be written down or cancelled |
Source: Singapore bank AT1 and subordinated notes offering circulars and issuer disclosures, 2026.
Subordinated Bond Example
A local bank issues an AT1 perpetual capital security carrying a fixed distribution rate, callable after five years, and if not redeemed by the issuer at that point, the rate resets based on the prevailing benchmark rate plus the original issue spread. If the bank’s capital ratio later falls below the pre-agreed trigger level, the issuer can cancel the distribution for that period, or in a severe case, permanently write down part of the bond’s principal — a risk that does not exist for holders of the same bank’s senior unsecured bonds or fixed deposits.
Advantages of Subordinated Bonds
- Higher yield. Investors are compensated with a meaningfully higher coupon than senior debt from the same issuer, reflecting the additional risk taken on.
- Issued by well-capitalised institutions. Singapore’s local banks are generally strongly rated, which can make their subordinated debt relatively more resilient than subordinated debt from weaker issuers.
- Diversification within fixed income. For investors who already understand the risk, subordinated debt can diversify a fixed income allocation beyond plain vanilla bonds.
- Regular income while performing. As long as no loss-absorption event is triggered, subordinated bonds pay a fixed distribution like any other bond.
Risks and Limitations
- Not suitable for most retail investors. AT1 securities in particular are explicitly flagged by issuers as requiring sufficient knowledge and expertise to assess conversion or write-down risk.
- Principal write-down risk. Unlike a standard bond or fixed deposit, principal can be permanently reduced if a loss-absorption trigger is hit.
- Distribution cancellation risk. Coupon payments can be cancelled at the issuer’s discretion under certain conditions, even without a full write-down event.
- Complexity. Call structures, reset mechanisms and trigger conditions vary by issue and require careful reading of the offering documents.
- Lower liquidity than government bonds. Subordinated corporate and bank debt is generally less liquid than Singapore Government Securities like SGS bonds or T-bills.
Subordinated Bond vs Senior Bond
| Aspect | Senior Bond | Subordinated Bond |
|---|---|---|
| Repayment priority | Higher | Lower |
| Typical yield | Lower | Higher |
| Loss-absorption features | Generally none | Common, especially for bank AT1 |
| Investor suitability | Broader | Requires higher risk understanding, often institutional-focused |
The Bottom Line
A subordinated bond pays more precisely because it carries more risk, sitting lower in the repayment queue and, for bank AT1 securities, carrying loss-absorption features that can reduce or eliminate returns under stress. The higher yield should always be weighed against this structural risk, not viewed in isolation from a comparable senior bond.
Frequently Asked Questions
What is a subordinated bond?
A subordinated bond is debt that ranks below senior debt in an issuer’s repayment priority, meaning subordinated bondholders are repaid after senior creditors if the issuer faces financial difficulty.
Why do subordinated bonds pay a higher yield?
Subordinated bonds compensate investors with a higher yield because they carry more risk, ranking lower in repayment priority and, in the case of bank AT1 securities, carrying loss-absorption features.
What is an AT1 perpetual capital security?
AT1, or Additional Tier 1, securities are a type of subordinated bank capital instrument that can have coupon payments cancelled or principal written down if the bank’s capital ratios fall below a specified trigger level.
Are subordinated bonds suitable for retail investors?
AT1 securities are generally flagged by issuers as unsuitable for retail investors due to their complexity and loss-absorption risk, and typically require sufficient knowledge to evaluate the risk of a conversion or write-down event.
Do Singapore's local banks issue subordinated bonds?
Yes, DBS, OCBC and UOB each periodically issue SGD-denominated subordinated notes and AT1 perpetual capital securities as part of their regulatory capital structure.