Pari passu
Pari passu (Latin for "with equal step" or "on equal footing") describes equal ranking. In loan documentation, a pari passu representation or clause states that the borrower's obligations under the facility rank equally in right of payment with its other unsecured and unsubordinated debts, subject only to preferences imposed by mandatory law.
How pari passu is used on PF and CRE desks
On project finance and commercial real estate desks, pari passu language appears in two related settings. First, among lenders in the same senior tranche: each senior lender shares pro rata in payments and enforcement proceeds according to commitment or outstandings, unless an intercreditor agreement says otherwise. Second, as a borrower representation that the facility ranks equally with other present and future unsecured, unsubordinated debt.
The ACT Borrower's Guide to LMA investment grade documentation explains the LMA pari passu ranking representation as comfort for unsecured lenders that their claims rank equally with those of other unsecured and unsubordinated creditors, other than creditors mandatorily preferred by law. CABRI's background paper on financing agreement negotiation likewise treats the pari passu clause as a standard unsecured-debt protection: the borrower promises that the obligation will rank equally in right of payment with other unsubordinated debts.
In secured project finance, equal ranking among senior creditors is usually achieved through a shared security package and waterfall rather than through an unsecured ranking representation alone. AFME describes security and covenant packages that segregate assets and cash flows for the lender group as a whole.
Mechanics and scope
A typical corporate representation affirms that payment obligations under the finance documents rank at least pari passu with all other unsecured and unsubordinated obligations. It does not, by itself, create security. Preferential creditors under insolvency law (for example certain employee or tax claims, depending on jurisdiction) sit outside the contractual ranking promise.
Among syndicate members, pari passu sharing often operates through:
- pro rata payment waterfalls
- turnover or sharing clauses if one lender receives a preferential recovery
- common security held by a security trustee for the class
Senior/mezzanine or first-lien/second-lien structures are intentionally not pari passu across classes; intercreditor terms fix the priority ladder.
Distinctions
Pari passu ranks claims. A negative pledge restricts the creation of security that would prefer other creditors. Equal ranking is not the same as equal payment timing in every market interpretation; some sovereign and bond formulations expressly disclaim any obligation to make rateable payments at the same time. A cross-default clause preserves bargaining parity when another creditor can accelerate; it is a default trigger, not a ranking rule.