When are senior ranking creditors subordinated? The answer is: when you own the Macquarie Bank Capital Notes and a capital event occurs. Let me explain. Along with its investor update on Monday, Macquarie Group launched a capital note issue by Macquarie Bank - a wholly owned subsidiary.The bank is seeking to raise A$400 million, more or less, of additional tier one capital through the hybrid note issue.The Macquarie Bank Capital Notes are referred to as BCNs, to distinguish them from the Macquarie Group Capital Notes (MCNs) issued in June last year.The BCNs are Basel III compliant and therefore will pay discretionary, non-cumulative dividends. The dividends will be based on a credit spread of 310 basis points to 330 bps over the 180-day bank bill rate. At this stage the dividends are expected to be only 40 per cent franked, as are dividends on Macquarie Group's ordinary shares. This is a similar to dividends on the capital note issue recently opened by Challenger Limited, which are expected to be 70 per cent franked. Using the example given by Macquarie, the BCNs will yield 5.8 per cent before tax for the first distribution. Allowing for franking credits will reduce the cash payment to a yield of 4.9512 per cent.However, this yield is actually slightly better than the current prospective yield of 4.7 per cent on Macquarie Group shares. Investors in the Challenger capital notes can also anticipate a yield better than that on offer to Challenger equity holders.This is a very rare occurrence in the hybrid note market and provides a real incentive to hold the hybrids notes rather than the underlying equities, but only just.The BCNs are perpetual, convertible, redeemable and subject to the standard capital event and non-viability triggers, which could see investors' holdings mandatorily converted into Macquarie Bank shares or written-off. There is no capital event trigger on the Challenger capital notes (because it is an insurance company and not a bank) and there is no capital event trigger on the MCNs because they are issued by a holding company.This brings us to the point about senior ranking creditors being subordinated.BCN holders will be creditors of Macquarie Bank, the main operating subsidiary in Macquarie Group, and therefore have a direct claim against the assets of the bank. MCN holders are creditors of the holding company and therefore structurally subordinated to creditors of the bank, as they can only claim against the assets of the bank as shareholders (and only after all other claims have been met).However, with only the BCN holders being subject to a capital event conversion trigger, their notes could be converted to Macquarie Group equity, while MCN holders remain unconverted. MCN holders will only be converted upon the declaration of non-viability and, in the meantime, MCN holders will hold a senior ranking position in the capital structure of Macquarie Group to the former BCN holders.This would be an invidious position for BCN holders converted to equity owners. And to add insult to injury, MCN holders are receiving 400