Investopedia: What is 'Pari-passu'?

Investopedia

Pari-passu

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.
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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.
Next Up Unsecured Debt

    Pari-passu
    Unsecured Debt
    Receiver
    Unsecured Creditor
    Secured Creditor
    Liquidation
    Unsecured Loan
    Preferred Creditor
    Cram-Up
    Notice To Creditors

Unsecured Debt
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Unsecured debt is a loan that is not backed by an underlying asset. Unsecured debt includes credit card debt, medical bills, utility bills and other types of loans or credit that were extended without a collateral requirement. This type of debt presents a high risk for lenders, also referred to as the creditor, since they may have to sue for repayment if the borrower doesn't repay the full amount owed.
BREAKING DOWN 'Unsecured Debt'
Unsecured debt can be personal or business debt. As a result of the high risk to the lender, unsecured debt tends to come with high interest rates, which increases the financial burden on the borrower. Borrowers can wipe out unsecured debt by declaring bankruptcy, but taking this dramatic step makes it more difficult to obtain a future unsecured loan.

Secured Debt Vs. Unsecured Debt

Unlike unsecured debt, secured debt is backed by an asset, such as real estate or a vehicle, also known as collateral. Under the terms of a secured loan, the lender is allowed to seize the collateral used to guarantee the loan if the borrower defaults. Examples of secured debt include mortgages, which are secured by real estate, and title loans, which are secured by vehicles. Since the borrower has more to lose by defaulting on a secured loan and the lender has something to gain, this type of debt is less risky for the lender, and therefore comes with lower interest rates when compared to unsecured debt.
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