The purpose of the restrictive debt covenant that requires that subsequent borrowing be subordinated to the original loan is to ________.

Question

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The purpose of a subordination clause in a restrictive debt covenant is to protect the original lender's priority of claims during liquidation. Subsequent borrowing would be subordinated to the original loan, meaning that in the event of default or bankruptcy, the original lender would be paid first before any other creditors. This helps to mitigate the lender's risk and ensure that they are able to recover their investment in the event of a borrower's default.

The Purpose of the Restrictive Debt Covenant That Requires That