Subject 2. Seniority Ranking and Priority of Claims
#basic-concepts #cfa #cfa-level-1 #fixed-income #los-57-c #reading-57-fundamentals-of-credit-analysis
In finance,
seniority refers to the order of repayment in the event of a sale or bankruptcy of the issuer. In general,
secured debt takes priority over
unsecured debt if the issuer goes bankrupt. Within unsecured debt,
senior debt ranks ahead of
subordinated debt. The
seniority ranking of securities results what is called
priority of claims.
- Secured debt holders get paid first.
- Unsecured debt holders get paid before equity owners.
- Senior creditors take priority over junior (subordinated) creditors.
The priority of claims is not always absolute. It can be influenced by several factors, such as government involvement, leeway accorded to bankruptcy judges, and the bias toward reorganization instead of liquidation.
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