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Yesterday, I was at a lecture where the speaker said that the impact of derivatives was often to make senior debt, in effect, subordinated debt (in terms of priority, recovery rates, etc.)?

How do derivatives accomplish this result? Are they usually listed on the balance sheet? (I have thought that most of the time, they were off balance sheet contingent liabilities)? Does one need to "recast" the balance sheet to display their position/impact, even if they are technically off balance sheet? Or is it the case that they weaken the income statement, basically the interest and debt service coverage ratios to the degree that formerly "safe" senior debt is no long so safe?

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