What Is Pari-Passu?

Pari-passu is a Latin phrase that means "equal footing" and describes situations in which two or more assets, securities, 澳洲幸运5官方开奖结果体彩网:creditors, or obligations𒆙 are treated equally, without preference or priority.

A common example of pari-passu occurs during 澳洲幸运5官方开奖结果体彩网:bankruptcy proceedings. In these cases, all creditors are treated equally, and the court orders that they be repaid in equal fractional amounts. This ensures that no creditor is given prefe♑rence over another during the process.

Pari-passu may describe certain clauses within a variety of financial vehicles, such as loans and bonds, which are debt instruments issued by companies to raise cash. These clauses are often in place to ensure theꦉ associated financial product functions are equal to all similar others.

How Pari-Passu Works

In finance, the term pari-passu can refer to loans, bonds, or 澳洲幸运5官方开奖结果体彩网:classes of shares that have equal rights of payment or equal seniority. Pari-passu can describe any instance where two or more items can claim equal rights as the other.

Equity Shares

Within the marketplace, all new equity shares (called a 澳洲幸运5官方开奖结果体彩网:secondary offering) have equal rights with existing shares or those that were previously issued. In that sense, the shares are pari-passu. Pari-passu can apply to common stock shares, for example, so that each 澳洲幸运5官方开奖结果体彩网:shareholder has equal rights to claims for 澳洲幸运5官方开奖结果体彩网:dividends, 澳洲幸运5官方开奖结果体彩网:voting rights, and the 澳洲幸运5官方开奖结果体彩网:liquidation of assets.

Creditors

However, pari-passu does not apply to creditors such as banks. If a company has debt or loans outstanding, there's a pecking order in which certain creditors are repaid first in the event of 澳洲幸运5官方开奖结果体彩网:bankruptcy and liquidation of the company's assets.

As a result, pari-passu would not apply to creditors and shareholders since the creditors would be paid before the shareholders. So while shareholders and creditors are not pari-passu, these creditors𒈔, when compared to other cr🐼editors, are.

Assets and Securities

Pari-passu is also used to describe securities, such as stocks. 澳洲幸运5官方开奖结果体彩网:Preferred stock has a higher priority over common stock, meaning that the holders of preferred shares receive the first payout if a company is dissolved. Stocks are considered pari-passu if they rank equally with preferred stock for dividends and liquidation.

Wills and Trusts

Wills and trusts can assign a pari-passu distribution where all the named parties share the assets equally. In other words, eac☂h named beneficiaries would get the same amount.

Similar Products

Often, identical items will be pari-passu, coming with the same benefits and costs as the other items with which they are grouped. In other situ🐓ations, items may only be pari-passu in one or only certain aspect🧸s. For example, two competitors may offer two functionally identical widgets for the same price with superficial differences such as color. These widgets are functionally pari-passu but may be aesthetically different.

Pari-Passu and Unsecured Debts

Since an asset backs secured debts, they are often not fully equal to the other obligations held by the borrower. Since no asset supports unsecured debts, there are greater instances of borrower default or bankruptcy. Further, a provider of unsecured financing may enact clauses that prevent a borrower from taking part in certain activities, such as the promising of assets for another debt to keep a position with regard to repayment.

A 澳洲幸运5官方开奖结果体彩网:parity bond refers to two or more bond issues with equal rights of payment or equal seniority to one another. In other words, a parity bond is an issued bond with the same rights to a claim as any other bonds that have already been issued. For example, unsecured bonds have equal rights in that coupons may be claimed without any particular bond having priority over another. Therefore, unsecured bonds would be referred to as parity bonds with each other. Similarly, secured bonds are parity bonds with other 澳洲幸运5官方开奖结果体彩网:secured bonds.

Pari-Passu vs. Pro Rata

Pro rata is another Latin term that means "in proportion." This term is usually used in situations where two parties have an unequal stake in a business or enterprise. If Party A has an 80% stake in a certain company and Party B has a 20% stake, a pro-rata division of profits would return 80% of the gains to A and 20% to B.

Counterintuitively, some pari passu obligations might result in a pro-rata division of benefits. Dividing the asset in proportion to each party's contribution is the only way to ensure an equal footing.

For example, consider a case of default where one creditor is owed $10,000, and another is owed $5,000. However, the debtor only has $6,000 in assets. If the debts are held pari-passu, the only equitable division is for the first creditor to receive $4,000 and the other to receive $2,000. By using a pro rata distribution, both c♈reditors face proportionately equal losses.

Example of Pari-Passu

Parity bonds have equal rights to the coupon or nominal yield. In fixed-incom🅷e investments, the coupon is the annual interest rate paid on a bond. Consider a $1,000 bond with a 7% coupon rate. The bond will pay $70 per year. If new bonds with a 5% coupon are ཧissued as parity bonds, the new bonds will pay $50 per year, but bondholders will have equal rights to the coupon.

A parity bond stands in contrast to a junior or senior lien bond. A junior lien bond, also called a 澳洲幸运5官方开奖结果体彩网:subordinate bond, has a subordinate claim to pledged revenue compared to a senior lien bond, also called a first lien bond. Unsecured debts are subordinate bonds compared to secured debts.

The Bottom Line

Pari-Passu means "equal footing," and in finance, it means two or more parties treated the same regarding a financial claim or contract. This term can apply to many different areas of finance, including shares, loans, or bonds with equal seniority or payment rights.