how pari passu works
in finance the term pari passu can refer to loans bonds or 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 1within the marketplace all new equity shares called a 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 shareholder has equal rights to claims for dividends voting rights and the liquidation of assets 2however 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 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 creditors when compared to other creditors are pari passu is also used to describe securities such as stocks 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 3wills and trusts can assign a pari passu distribution where all the named parties share the assets equally in other words each of the named beneficiaries would get the same amount 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 situations items may only be pari passu in one or only certain aspects 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 debtssince an asset backs secured debts they are often not fully equal to the other obligations held by the borrower since there is no asset supporting 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 4a 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 secured bonds 5pari passu usually comes into play when dealing with unsecured debt obligations pari passu vs pro ratapro rata is another latin term that means in proportion usually this term is 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 this is because the only way to ensure an equal footing is by dividing the asset in proportion to each party s contribution 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 creditors face proportionately equal losses example of pari passuparity bonds have equal rights to the coupon or nominal yield in fixed income 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 issued 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 lien or a senior lien bond a junior lien bond also called a subordinate bond has a subordinate claim to pledged revenue as compared to a senior lien bond which is also called a first lien bond unsecured debts are subordinate bonds compared to secured debts 67