What is pari passu?

When a borrower cannot pay everyone, the order of payment decides who gets what. Ranking pari passu means two or more claims sit at the same level. Whatever money is available is divided between them in proportion to the size of each debt, so if there is enough to cover half the claims, each lender receives half of what it is owed.

Equal ranking says nothing about how protected you are overall. Secured creditors are paid from the assets they hold a charge over first, and Australian insolvency law gives some claims, including employee entitlements, priority over ordinary unsecured creditors. Ranking equally with other unsecured lenders can still mean a small recovery.

The most common form is a ranking statement: the borrower confirms that its obligations under this facility rank at least equally with its other unsecured and unsubordinated debts. That stops a business quietly promising a later financier it will be paid ahead of everyone else.

The phrase also turns up in intercreditor deeds. Two financiers funding the same business can agree to share one pool of collateral rateably instead of arguing about who registered first. In syndicated lending, sharing clauses go further and require any lender that recovers more than its proportion to pass the excess back, which is where the deed and the covenants do the real work.

For a lender, ranking drives pricing. Money that ranks equally with everyone else carries different risk to money that sits behind them, which is one reason mezzanine finance costs more than senior debt.

For a business, the practical point is that you can only promise equal ranking if you know what you have already promised. Before signing a new facility, check whether an existing financier has been given priority, a charge or a written undertaking, because an inaccurate ranking statement puts you in breach from day one. It is one reason brokers ask for a full list of existing facilities up front.