The latest edition of the Austrian Financial Market Authority’s (FMA) information series “Let’s talk about money” addresses qualified subordinated loans – a risky form of financing that is frequently used for real estate or commercial projects.
Investors lend a company money mostly use qualified subordinated loans for real estate or commercial projects. If a company becomes insolvent, such loans are only serviced once all other creditors have been satisfied: there is no recourse to a deposit guarantee scheme or a guaranteed repayment. Often, there is no money left to repay subordinate creditors. Additionally, repayment may be postponed, if the company falls into financial difficulties. A total loss is possible. Investors have no right to a say or participation in profits.
High interest rates are supposed to offset the risk. The FMA however warns: Promised high rates of interest without a plausible business model are a tell-tale warning sign. Only invest with providers that are transparent, and only invest money that you can afford to lose.
The FMA recommends that you check the subordination clause in the contract particularly diligently. It states that interest payments and repayments shall only be permitted if the company is in a financially sound position, and where no risks emerge from the payment. The clause must be formulated in a transparent and legally effective way – otherwise it may be ineffective.
Summary
Qualified subordinated loans as not a safe form of investment, but are high risk investments with a risk of a total loss. The FMA advises investors to inform themselves fully and to obtain independent advice where they are uncertain.
The latest edition of “Let’s talk about money” entitled “Get to the back of the queue!” as well as all previous editions are available for download online at https://redenwiruebergeld.fma.gv.at/en. Further information about financial topics can be found in the “A-Z of Finance” section of the FMA’s website.
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Journalists may address further enquiries to
Boris Gröndahl (FMA Media Spokesperson)
Telephone: +43/(1)249/59-6010
Mobile: +43 676 8824 9995
E-Mail: [email protected]