what is subordination based notching 
subordination based notching is a method of rating the credit risk of bond or debt issuers based on the level of subordination of the issuer s debts subordination refers to the ranking of debts in terms of priority for repayment in the event that the issuer becomes bankrupt or is unable to meet its financial obligations debts that are ranked higher in the subordination hierarchy are considered to be more senior and are more likely to be repaid in the event of default subordination based notching is used to determine the credit rating of an issuer by taking into account the level of subordination of the issuer s debts for example an issuer with highly subordinated debts i e debts that are ranked lower in the subordination hierarchy may be assigned a lower credit rating than an issuer with more senior debts this is because the issuer with highly subordinated debts is considered to be at a higher risk of default as it is less likely to have the financial resources available to meet its obligations subordination based notching is often used in the evaluation of structured finance instruments such as collateralized debt obligations cdos the bottom linenotching is the process of rating the credit risk of the various bonds from the same debt issuer such as a company or a government using discrete rating levels or notches so if a company issues several bonds not every one may receive the same credit rating based on its relative riskiness terms features subordination and clauses it is used to determine the likelihood that the issuer will default on its debt obligations notching can be used to determine the credit rating of an issuer which is a measure of the issuer s ability to make timely interest and principal payments notching can also be used to determine the risk premium that investors should demand for taking on the risk of investing in the bond or debt issuer 