Pari passu is a Latin phrase that translates to “with equal step.” In the legal realm, pari passu refers to the equal treatment of two or more parties. A pari passu agreement typically involves borrowers and lenders and aims to ensure that all parties receive equal treatment when it comes to repayment or distribution of assets.
Pari passu agreements are often used in syndicated loans, where multiple lenders provide funding to a borrower. In this scenario, the agreement stipulates that all lenders will be treated equally in terms of repayment and/or recovery of assets. This means that if the borrower defaults, all lenders will be repaid in proportion to the size of their loan.
The pari passu clause is also commonly used in bond issuances. Here, the agreement ensures that all bondholders receive the same rights and treatment. This means that if the issuer defaults, all bondholders will be treated equally in terms of repayment and recovery of assets.
In addition to ensuring equal treatment, pari passu agreements can also provide protection for lenders and bondholders. For example, if a borrower or issuer were to default, the pari passu clause could prevent other creditors from taking priority over the lenders or bondholders with the pari passu protection.
It’s important to note that pari passu agreements may vary depending on the specific circumstances and the type of financing involved. There may be additional clauses included in the agreement, such as subordination clauses, which determine the order in which different creditors will be repaid in the event of a default.
In conclusion, a pari passu agreement is an important legal agreement that helps ensure equal treatment for all parties involved in a lending or bond issuance scenario. It provides protection for lenders and bondholders and can prevent other creditors from taking priority over those with the pari passu protection. Understanding the details of a pari passu agreement can help all parties involved make informed decisions and mitigate risk.