What is pari passu?

Pari Passu

Pari passu is a Latin phrase that translates to "on equal footing" or "with equal step." In a legal and financial context, it signifies that two or more creditors or securities rank equally in priority of payment or claim against a debtor.

Key Aspects:

• Equal Ranking: The core principle is that all obligations with pari passu status are treated the same way. If a debtor defaults, these obligations will be repaid proportionally.
• Debt Restructuring: Pari passu clauses are particularly important in situations such as <a href="https://www.wikiwhat.page/kavramlar/Debt%20Restructuring">debt restructuring</a>, where a borrower may be renegotiating the terms of its obligations.
• Sovereign Debt: In the context of <a href="https://www.wikiwhat.page/kavramlar/Sovereign%20Debt">sovereign debt</a>, pari passu clauses can be complex. They generally imply that all creditors of a sovereign nation should be treated equally in the event of default. Interpretations and enforcement can be contentious.
• Impact on Risk Assessment: Understanding pari passu ranking is crucial for <a href="https://www.wikiwhat.page/kavramlar/Risk%20Assessment">risk assessment</a> by investors and lenders. It helps determine the potential recovery rate in case of a default scenario.
• Contractual Nature: Pari passu rights are usually created by contract. The specific wording and interpretation of pari passu clauses can significantly impact their effect.
• Securitization: In securitization, tranches with pari passu rights share losses and gains proportionally.