Debt Preference

TiGeR KiNgS

In a company insolvency scenario,

If a company can't pay back all its debt are the senior debt holders repaid in full before the junior debt holders ?

e.g
Cash on hand 100,000
Bank loan (senior debt) (75,000)
Bonds (junior debt) (50,000)
Deficit (25,000)

Bank is paid the full 75,000 first
with the second tranche (bonds) repaid the balance e.g 25,000 in this example for a haircut of 50%.

i.e in above case the bank loan would never be cut ? (except for an atypical situation).

Correct ?

The_Pretender

It depends on how each creditor ranks. There are fixed charge holders, preferential creditors, floating charge holders and unsecured creditors. Outside of a fixed charge on an asset banks usually have a floating charge which, unless it has crystallised (and a Receiver appointed) prior to liquidation then they will rank after preferential creditors (Revenue, Rates, Dept. of Social Protection). Each class of creditor is paid in full in order of ranking, with the balance going down the chain to pay lower ranking creditors.

But yes, going on your above example it looks as if that would be the case.