Finance term
Pari Passu
Also known as: equal ranking, ratable, pro-rata, equal footing
Definition
Pari passu (Latin: 'equal step') is a legal term meaning two or more obligations rank equally and share priority — neither has preference over the other in the event of default or liquidation. Lenders, bondholders, or creditors described as pari passu receive equal treatment in payment and enforcement.
Detailed explanation
In lending and capital markets, pari passu describes equal ranking among creditors — no one has seniority, and collections or distributions are shared proportionately. The term appears in loan agreements (among co-lenders in a syndicated facility), bond indentures (all bonds of the same series), and intercreditor agreements (defining the relative priority of different debt instruments).
Common pari passu applications: (1) Syndicated loans — all lenders in a syndicate are typically pari passu with one another, sharing collateral and recovery pro-rata. (2) Bond issuance — a company's senior unsecured notes typically rank pari passu with each other and pari passu with all other unsecured senior debt. (3) Intercreditor agreements — define whether two debt instruments rank pari passu (equal priority) or one is senior and one is subordinated.
Pari passu clauses in sovereign debt became prominent in the 2001 Argentine debt crisis. Argentina's bonds contained pari passu clauses that certain holdout creditors (NML Capital) successfully argued required Argentina to pay holdouts equally with any restructured creditors. The resulting litigation (Republic of Argentina v. NML Capital) reshaped sovereign debt documentation globally. See U.S. Court of Appeals Second Circuit rulings for case law context.
For business borrowers, pari passu is relevant when a lender requests that all new debt be pari passu with existing debt — meaning the borrower cannot issue higher-priority debt that would push the existing lender down the priority stack without consent.
◈ Worked example
- Syndicated loan: A $20M term loan syndicated to 5 lenders — each holds a $4M pari passu share. If the borrower defaults and collateral is liquidated for $10M, each lender receives $2M (50% recovery, pro-rata).
- Bond indenture: An indenture states: 'The Notes rank pari passu in right of payment with all existing and future senior unsecured indebtedness of the Company.' A later creditor attempting to secure a senior secured loan would be permitted, but would be senior — not pari passu — with the noteholders.
- Intercreditor agreement: Two lenders provide a $10M first-lien and $5M second-lien. The second-lien lender explicitly agrees to be subordinated (not pari passu) to the first-lien in collateral enforcement — but both are pari passu in their rights against the guarantor (unsecured).
Common questions
The most-asked questions about Pari Passu — answered straightforwardly.
What does pari passu mean in a loan agreement? +
It means the obligation being created ranks equally with the specified existing obligations — in priority of payment, in collateral access, and in enforcement rights. When a loan agreement states that a new loan is pari passu with an existing loan, neither lender can claim preference over the other from collateral proceeds in a default.
What is the opposite of pari passu? +
Subordination. Subordinated debt ranks below senior debt in priority — in default, senior creditors are paid first. 'Pari passu' and 'subordination' are the two poles of creditor priority arrangements. Between them exist various structural protections (security interests, guarantees) that can elevate effective priority even among technically equal creditors.
Further reading
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