In a loan structure, pari passu means two or more debts rank equally: they share the same collateral and are paid in proportion to what each is owed, with neither ahead of the other. If collateral worth 500 secures pari passu loans of 600 and 400, the lenders recover 300 and 200. It is the opposite of a first and second lien structure, where one lender is paid in full first. It shows up in club deals, where several lenders share one loan; between a revolver and term loan under one credit agreement; and when two lenders agree to share the same security.
- Meaning
- Equal ranking: same priority on collateral and payment
- How losses fall
- Pro rata, in proportion to each lender's share
- Where you see it
- Club and syndicated loans; two lenders sharing security
- Documented by
- A credit agreement with a sharing clause, or an intercreditor agreement
- Opposite of
- Subordinated, second lien or last-out debt
Equal ranking, pro rata sharing
Two loans are pari passu when neither has priority over the other. In practice that means three things. They share the same collateral with equal-ranking liens. Proceeds from that collateral, after a sale or a foreclosure, are split in proportion to the amounts owed. And, usually, any payment one lender receives outside the agreed arrangement, from a set-off against a deposit account for instance, must be shared with the other so both stay in step.
The contrast with a ranked structure is easiest to see with numbers. Take a borrower owing 1,000 in total, split 600 and 400, and collateral that sells for 500:
| Structure | Lender A (owed 600) | Lender B (owed 400) | Who bears the shortfall of 500 |
|---|---|---|---|
| Pari passu | Recovers 300 | Recovers 200 | Both, in proportion: A loses 300, B loses 200 |
| A first lien, B second lien | Recovers 500 | Recovers nothing | A loses 100, B loses all 400 |
| B first lien, A second lien | Recovers 100 | Recovers 400 | B is whole; A loses 500 |
| A first-out, B last-out in a unitranche | Recovers 500 | Recovers nothing | The same as first and second lien, inside one loan |
Equal ranking also usually means equal treatment while the business performs: scheduled payments go to both lenders on the same terms. A pari passu structure can still give lenders different interest rates or maturities; what is equal is their claim on the collateral and on recoveries.
Where pari passu debt shows up
Club deals. When a loan is too large, or too concentrated, for one lender to want all of it, two or more lenders share it. There is one credit agreement, one set of collateral documents held by an agent for all the lenders, and a sharing clause. Each lender holds a slice, and the slices rank equally. In the lower middle market, club deals are common among banks and private credit funds on larger loans, and among community banks that each want to limit their exposure to one borrower. See types of lenders in the lower middle market.
Two lenders sharing security. A borrower with two separate loans, say a term loan from one lender and a real estate loan from another, sometimes has the lenders agree to share collateral equally rather than split it. That takes an intercreditor agreement saying so; without one, Article 9 generally ranks liens by filing order, and "equal" is not the default.
A revolver and term loan in one facility. When a bank or fund provides both a revolving line and a term loan under one credit agreement, the two usually share the same collateral package on equal terms. The agreement's payment waterfall can still direct proceeds of a sale or default in a set order, so read it rather than assume. Hedging obligations owed to a lender in the group, such as an interest rate swap, commonly share the same collateral.
Split collateral, as a contrast. An asset-based lender and a term lender often divide the collateral instead of sharing it: the line takes the first lien on receivables and inventory, the term loan the first lien on equipment, real estate and intangibles, and each takes a second lien on the other's. That is two ranked structures side by side, not pari passu. See ABL and term loan split-lien structures.
Pari passu in lien, not always in fact
Two lenders can rank equally on paper and still not be equal in practice. The usual reason is structural subordination. If one lender lends to the operating company and the other to a holding company above it, the operating company's creditors are paid from the operating assets first, whatever the documents say about equal ranking. The holding company lender's pari passu lien on the shares of the operating company is worth only what is left after the operating company's debts. See holding company versus operating company debt.
The other is guarantees. If one lender is guaranteed by every company in the group and the other only by the borrower, the first has more places to recover from, even if their liens on the borrower's assets are equal.
Equal ranking is about the claim on the same collateral. Check which company owes each loan and who guarantees it before assuming two lenders are really equal.
What equal ranking means for the borrower
Pari passu structures let a business borrow more on one set of terms than any single lender would hold, without paying for a junior layer. They are harder to manage in other ways:
- Decisions by majority. In a club deal, amendments and waivers usually need the consent of lenders holding a majority of the loan, and some changes, such as reducing principal, need every lender. A single holdout can slow a covenant fix.
- One agent, one voice. Day to day, the borrower deals with an administrative agent, which is simpler. In a default, the agent acts on the lenders' instructions.
- No lender can be paid off early alone. Sharing clauses usually stop the borrower from repaying one lender ahead of the others outside the agreed terms.
- Replacing one lender takes a buyer. Replacing one lender in a club means another has to buy its slice on the same terms.
Pari passu compared with the alternatives
| Structure | Ranking | Documents | Borrower's experience |
|---|---|---|---|
| Pari passu club | Equal, pro rata | One credit agreement, sharing clause, agent | One set of terms; majority votes on changes |
| First and second lien | Senior first on collateral | Two credit agreements, an intercreditor agreement | Two relationships; see second lien loans |
| Unitranche with first-out and last-out | Ranked inside one loan | One credit agreement plus an agreement among lenders | One set of terms; the ranking is the lenders' business |
| Senior plus subordinated debt | Senior first in payment and collateral | Credit agreement plus a subordination agreement | Junior payments can be blocked |
Which structure fits depends on the size of the financing, the collateral and how many lenders are needed to hold it. When a financing needs more than one lender, the whole structure, including how the lenders would rank and share collateral, belongs in the lender package, so each lender reviews the same proposal. See what goes in the package and first lien versus second lien.
Common questions
- What does pari passu mean in plain English?
- Equal footing. Pari passu loans share the same collateral and the same priority, and are paid in proportion to what each is owed. If there is not enough to repay everyone, the loss is shared pro rata.
- Is pari passu the same as a club deal?
- A club deal is one common place pari passu debt appears: several lenders share one loan with equal ranking. Two separate loans can also be pari passu if the lenders agree to share collateral equally in an intercreditor agreement.
- Can pari passu lenders charge different rates?
- Yes. Pari passu describes ranking on collateral and in recoveries. Two pari passu tranches can carry different rates, maturities or amortization, though in a single club loan the lenders usually share the same terms.
- Are a revolver and term loan under one agreement pari passu?
- Usually, in the sense that they share the same collateral on equal terms. The credit agreement's waterfall decides the order in which proceeds are applied after a default, and some deals give the revolver or hedging a priority there, so the waterfall is the clause to read.
- Are two loans pari passu if their liens were filed together?
- Not automatically. Article 9 generally ranks liens by the order of filing or perfection. Equal ranking comes from an agreement between the lenders, not from timing.