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Subject 2. Seniority Ranking and Priority of Claims PDF Download
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.
Learning Outcome Statementsc. describe seniority rankings of corporate debt and explain the potential violation of the priority of claims in a bankruptcy proceeding;
CFA® 2021 Level I Curriculum, 2021, Volume 5, Reading 47
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