What is Pari-passu
Pari-passu is a Latin phrase meaning "equal footing" that describes situations where two or more assets, securities, creditors or obligations are equally managed without preference. An example of pari-passu occurs during bankruptcy proceedings: When the court reaches a verdict, the court regards all creditors equally, and the trustee will repay them the same fractional amount as other creditors at the same time.
BREAKING DOWN Pari-passu
In finance, the term pari-passu refers to loans, bonds or classes of shares that have equal rights of payment or equal seniority. In addition, secondary issues of shares that have equal rights with existing shares rank pari-passu. Wills and trusts can assign an in pari-passu distribution where all the all the named parties share the assets equally.
Pari-passu can describe any instance where two or more items can claim equal rights as the other. Within the marketplace, all new shares within an offering have the same rights as those that issued during a previous offering. In that sense, the shares are pari-passu.
Often, identical items will be pari-passu, coming with the same benefits and costs of 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 may describe certain clauses within a variety of financial vehicles, such as loans and bonds. Often, these clauses are in place to ensure the associated financial product is functioning as an equal to all similar others. As it relates to debt, these are most often in place when dealing with unsecured obligations.
Secured and Unsecured Debts
Since 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.