Fixed Income
Pari-Passu and Equal Ranking in Claims
In credit markets, not all creditors stand in the same position. When a borrower faces financial distress, the order in which claims are satisfied becomes critical. The term pari-passu addresses this exact issue.
The phrase means “on equal footing.” In finance, it refers to claims that rank equally in terms of priority.
What Pari-Passu Really Means
When two obligations are described as pari-passu, they have the same legal ranking.
If the issuer defaults and assets are distributed, holders of pari-passu debt are entitled to payment proportionally, without one group being paid ahead of the other.
It does not mean full repayment. It means equal treatment.
Where Pari-Passu Appears
Pari-passu language commonly appears in bond indentures and loan agreements.
For example, unsecured bonds issued by the same company often rank pari-passu with one another. This ensures that no new unsecured creditor is given priority over existing ones unless specifically stated.
Exams may frame this within capital structure analysis.
Pari-Passu vs Seniority
Pari-passu should not be confused with senior debt.
Senior debt ranks ahead of subordinated debt. Within senior debt, different issues may rank pari-passu with each other.
The key idea is equal ranking within the same class, not ranking above all others.
Importance in Default Scenarios
During restructuring or liquidation, recovery rates depend heavily on claim priority.
If two bond issues rank pari-passu, recoveries are shared proportionally. If one issue is subordinated, its recovery may be lower.
Understanding this hierarchy is central to credit risk analysis.
Why It Matters for Investors
Pari-passu clauses protect creditors from being unfairly diluted in priority.
Without such clauses, a company could issue new debt with higher ranking, weakening the position of existing lenders.
This protection is particularly important in covenant analysis.
Common Student Errors
Students sometimes:
- assume pari-passu guarantees full repayment
- confuse equal ranking with equal security
- ignore capital structure when evaluating recovery
These distinctions often appear in exam scenarios involving default.
Final Perspective
Pari-passu means equal ranking among claims. It determines how creditors share recoveries if a borrower defaults. For exam preparation, focus on how pari-passu interacts with seniority, subordination, and recovery analysis. Once the capital structure hierarchy is clear, this concept becomes straightforward.
