What is the concept of structural subordination?

The concept of structural subordination refers to the hierarchy in which a company's creditors are prioritized during financial restructuring or liquidation processes. In this context, it highlights the distinction between the claims of Holdco (holding company) and opco (operating company) creditors.

In a structural subordination scenario, the operating company's creditors are typically given priority over those of the holding company. This means that when a company faces financial distress, the creditors of the operating company are paid first from the assets of the operating business before any residual funds can be used to settle the debts of the holding company. This hierarchy arises because the operating company's assets are usually the principal source of cash flow and collateral for the company, making those creditors more secure in terms of their claims.

Given this structure, the correct answer reflects the understanding that opco creditors have priority in payment over Holdco creditors, aligning with the risk profiles and asset backing available in each layer of the corporate structure. Thus, the answer demonstrates a clear understanding of how creditor rights are affected by the structural positioning of a company's operational and holding entities.