Claims against an entity with different seniorities

Claims against an entity with different seniorities – The following are a list of distinguished claims against an entity with a short explanation. Some claims take priority over other claims (‘are senior to’), which is also why the liquidation example is used. It also shows different types of equity claims, that also have a hierarchy between themselves regarding their seniority.

In finance, seniority refers to the order of repayment in the event of a sale or bankruptcy of the issuer. Seniority can refer to either debt or preferred stock. Senior debt must be repaid before subordinated (or junior) debt is repaid. Each security, either debt or equity, that a company issues has a specific seniority or ranking. Bonds that have the same seniority in a company’s capital structure are described as being pari passu. Preferred stock is senior to common stock in a sale when preferred shareholders must receive back their preference, typically their original investment amount, before the common shareholders receive anything. Claims against an entity with different seniorities

Type of claim

Explanation Claims against an entity with different seniorities

Ordinary bonds

The entity has an obligation to transfer an amount of cash, equal to an amount specified in a particular currency, at a specified time before liquidation and senior to all other items.

Shares redeemable for their fair value

The entity has an obligation to settle the claim with cash, at fair value, at a specified time before liquidation or on demand of the holder.

However, like ordinary shares (see below), they do not specify the amount of economic resources and claims that the entity needs to pay – i.e. the fair value of the shares reflects the total of recognised and unrecognised economic resources and other claims.

Share-settled bonds

These claims do not require the entity to settle the claim using economic resources – i.e. the entity uses a variable number of its own ordinary shares of an equal value to the amount specified instead of cash. However, like ordinary bonds, they specify the amount or rate of change in amount that the entity requires to settle the claims.

Cumulative preference shares

These claims are not required to be settled before liquidation of the entity.

However, like ordinary bonds, they specify the amount or rate of change in amount that the entity requires to settle the claims.

Ordinary shares

The entity has no obligation other than the obligation to transfer at liquidation a share of whatever type, and amount, of economic resources remain under the entity’s control after meeting all other claims.

Example – True sale securitization Claims against an entity with different seniorities

The true sale securitization process generally involves two steps. Claims against an entity with different seniorities

Firstly, the Originator identifies the assets or rights of which credit risk and/or legal ownership should be removed from its balance sheet and pooled. Originators aiming to remove both the legal ownership and the credit risk related to the assets or rights from their balance sheet sell and transfer the reference portfolio to an Securitization special purpose entity (SSPE).

In such “true sale” securitization transactions, it is imperative that once the sale and transfer of the assets or rights to the Securitization special purpose entity has been carried out, the transaction cannot be challenged, voided, or otherwise reversed if the Originator is declared insolvent or bankrupt. Claims against an entity with different seniorities

In step two of the process, the Issuer of the pooled assets or rights finances the acquisition through the issuance of tradeable and interest-bearing financial instruments that are sold to investors. As mentioned above, these bonds or notes can be sold in tranches with different seniorities in accordance with the cash waterfall. Claims against an entity with different seniorities

Claims against an entity with different seniorities
Overview of true sale securitization

At the time of winding up or bankruptcy of a company, it needs to repay its debts. The order in which these are repaid is referred to as seniority. Claims against an entity with different seniorities

Description: All securities, be it bonds or shares, are issued by the company with a certain seniority attached to them. As obvious, senior debts need to be paid before the junior ones. Generally, bonds/debts are the securities to be repaid first in case of winding up of a company.

These are followed by preference shares and last come the equity shares. In short, holders of ‘senior’ securities get the privilege of getting paid first, before the rest of the security holders.

Claims against an entity with different seniorities

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