What is Pari Passu?
The Short Answer
Pari Passu explained simply
Pari passu is a Latin phrase that translates to "on equal footing" or "side by side." In finance, it means that all parties involved in an agreement are treated equally. No one gets special treatment. This often comes up in debt agreements or investment rounds. It ensures fairness among creditors or investors.
Real-World Example
The Loan Agreement Scenario
Imagine a company takes out two loans from different banks. If both loans have a pari passu clause, it means that if the company defaults, both banks will be repaid at the same rate and proportion. Neither bank gets paid before the other. If there's only enough money to pay back 50% of the total debt, both banks get 50% of what they are owed.
Why this matters
Pari passu is important because it ensures fairness. It prevents one creditor from jumping ahead of others. This creates a level playing field for all parties involved in a financial agreement. It helps manage risk and expectations.
Always check for pari passu clauses in any financing agreement. It tells you where you stand in the repayment line. This is key for understanding your risk.
Always check for pari passu clauses in any financing agreement. It tells you where you stand in the repayment line. This is key for understanding your risk.
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