Pari-passu

Pari-passu is a Latin phrase meaning “equal footing.” In finance and law, it describes situations where two or more assets, securities, creditors, or obligations are treated equally—without preference or priority.

Key points

• Pari-passu denotes equal rank or equal treatment among parties to a claim or contract.
• It commonly appears in bankruptcy, bond indentures, loan agreements, wills, and trust documents.
• Pari-passu arrangements often result in pro rata distributions when available resources are limited.

How pari-passu works

Pari-passu can apply across different financial contexts:

Equity shares
* Shares are pari-passu when they carry the same rights (dividends, voting, liquidation) as other shares of the same class. For example, all common shares of a company are typically pari-passu with each other.

Creditors
* Pari-passu refers to relative seniority among creditors. Creditors that rank pari-passu have equal claim to the same pool of assets. It does not mean creditors are equal to shareholders—creditors are generally repaid before shareholders.

Securities and bonds
* Two bond issues are pari-passu (parity bonds) if they share equal rights of payment or seniority. Parity refers to claim rank, not necessarily identical coupon rates or other terms.

Wills and trusts
* A pari-passu clause in an estate or trust directs equal distribution among named beneficiaries (each beneficiary receives the same share).

Similar products or items
* Items can be pari-passu in function or entitlement even if they differ superficially (e.g., two products with equal price and utility but different color).

Unsecured debt and parity bonds

• Pari-passu is particularly relevant for unsecured obligations because unsecured creditors share the same claim pool without specific collateral.
• Parity bonds are bonds with equal rights to payment; unsecured parity bonds share the same priority among themselves, and secured bonds are pari-passu with other secured bonds of the same rank.

Pari-passu vs. pro rata

• Pari-passu describes equal rank or seniority.
• Pro rata means “in proportion”—distribution according to each party’s share or claim.
• When assets are insufficient, pari-passu creditors typically receive a pro rata distribution so that losses are shared proportionally.

Example:
Two creditors are owed $10,000 and $5,000. The debtor has $6,000 available. Under pari-passu with pro rata distribution:
* Creditor A: (10,000 / 15,000) × 6,000 = $4,000
* Creditor B: (5,000 / 15,000) × 6,000 = $2,000

Example — parity bonds and coupons

Parity bonds share equal claim priority. A $1,000 bond with a 7% coupon pays $70 annually; a different bond issued as a parity bond with a 5% coupon pays $50 annually. Both can be pari-passu (equal seniority) even though their coupon rates differ—the pari-passu concept pertains to claim rank, not identical cash flows.

Pari-passu in commercial real estate

In commercial real estate, pari-passu arrangements often mean profits, distributions, or repayments are shared pro rata according to each investor’s percentage interest or capital contribution.

Practical implications

• Clauses specifying pari-passu treatment clarify how claims will be handled in insolvency or distribution events.
• For lenders and investors, pari-passu language affects recovery prospects and influences negotiation of covenants, collateral, and subordination.

Conclusion

Pari-passu establishes equal footing among comparable creditors, securities, or beneficiaries. It defines relative seniority and typically leads to proportionate (pro rata) distributions when resources are limited, but it does not erase the seniority differences between fundamentally different classes (for example, secured creditors vs. unsecured creditors vs. equity holders).