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 any display of preference. An example of pari-passu occurs during bankruptcy proceedings when a verdict is reached: all creditors can be regarded equally and will be repaid at the same time and at the same fractional amount as all other creditors.
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 of the assets will be equally divided between the named parties.
Pari-passu can be used to describe any instance where two or more items can claim equal rights in regards to the other. Within the marketplace, all new shares within an offering have the same rights as those that were issued during a previous offering. In that sense, the shares are pari-passu.
Often, items that are considered identical 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 in Finance
Pari-passu may be used to 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 others of a similar nature. As it relates to debt, these are most often in place when dealing with unsecured obligations.
Secured and Unsecured Debts
Since secured debts are backed by a particular asset, they are often not fully equal to the other obligations held by the borrower. Since unsecured debts are not supported by a specific asset, the need to be considered equal to other obligations may be greater in 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, in order to keep a position with regard to repayment.