Pari Passu
Pari passu means that specified obligations rank equally with one another in a stated respect, such as right of payment or lien priority, rather than one being contractually junior to the other.
Equal ranking is narrower than identical economics
Pari passu describes relative ranking, not whether two instruments have the same coupon, maturity, amortization or covenant package. A five-year revolver and a seven-year term loan can share first-priority collateral pari passu while remaining very different investments.
Payment ranking and lien ranking are separate
Two unsecured notes can rank equally in right of payment even though neither has collateral. Conversely, two secured obligations can share collateral on an equal-priority basis. The relevant indenture, credit agreement and intercreditor agreement determine which type of equality applies.
Equal rank does not erase structural subordination
Parent-level debt can rank pari passu with other parent debt while still being structurally behind liabilities at a non-guarantor subsidiary. Subsidiary creditors have claims against subsidiary assets before value can move upstream to the parent.
Pari passu classes can still have different recoveries
A common lien position does not guarantee identical recovery. One class may benefit from additional guarantees, separate collateral, hedging rights or contractual claims outside the shared pool. Recovery also depends on actual collateral value and the amount of equal-priority debt sharing it.
Worked example: shared first-lien collateral
Assume $750 million of collateral supports a $600 million term loan and a $150 million revolver that rank pari passu. Before costs and other priority claims, the shared pool exactly covers both classes. If collateral value falls to $600 million, the equal-ranking debt shares the shortfall according to the governing allocation rules; the revolver does not jump ahead merely because it matures sooner.
Common mistakes
“Pari passu means the securities are identical.” No. It means equal ranking in a specified respect.
“Pari passu debt must have the same maturity.” No. Maturity can differ.
“Equal payment rank means equal collateral.” Payment and lien priority must be analyzed separately.
Example
A borrower has a $600 million first-lien term loan and a $150 million revolver. The documents provide that both facilities share the same collateral on a pari passu first-lien basis. Neither facility is junior to the other with respect to that shared collateral, even though the revolver matures earlier and has different pricing.
Example
A borrower has a $600 million first-lien term loan and a $150 million revolver. The documents provide that both facilities share the same collateral on a pari passu first-lien basis. Neither facility is junior to the other with respect to that shared collateral, even though the revolver matures earlier and has different pricing.
Professional note
Always complete the sentence: pari passu with respect to what? Payment ranking, lien priority, guarantees and structural position are separate questions.
Related terms
- Senior Secured Debt
Senior secured debt is debt that is senior in the borrower’s contractual capital structure and secured by liens on specified collateral, giving lenders a claim against pledged assets subject to lien priority, intercreditor arrangements and applicable law.
- First-Lien Debt
First-lien debt is secured debt that holds the first contractual lien priority over specified collateral, subject to permitted liens, equal-priority obligations and the governing intercreditor and security documents.
- Second-Lien Debt
Second-lien debt is secured debt whose lien on specified shared collateral ranks behind first-lien obligations under the applicable security and intercreditor arrangements.
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