Lesson 5 of 6 · 15 min
Seniority, priority of claims and recovery
Where a claim ranks in the priority of claims largely decides how much its holder recovers in default: secured debt first, then senior unsecured, then subordinated debt, then shareholders.
In short
- Seniority ranking: the order of payment. The most senior debt has the first claim on the issuer's cash flows and assets.
- Order: first lien / first mortgage → second lien and other senior secured → junior secured → senior unsecured → senior subordinated → subordinated → junior subordinated → equity.
- If pledged collateral is worth less than the secured claim, the shortfall becomes a senior unsecured claim.
- All creditors in one class rank pari passu regardless of maturity. Losses are absorbed from the bottom of the structure up.
- Recovery rates vary by seniority, industry and point in the credit cycle, and are only averages. Lower seniority → lower recovery → higher EL.
- In practice, negotiation can give junior claimants something before seniors are paid in full; outcomes depend on the country's bankruptcy laws.
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