Bond rank is a parameter that reflects the priority of payments on a bond in case of insufficient issuer funds. There are several criteria for determining rank.
By subordination, bonds are divided into:
- Unsubordinated;
- Subordinated.
Subordinated bonds have the lowest priority among the entire bond debt of the issuer, and any claims on them are closed last.
By security, bonds are divided into:
- Secured;
- Unsecured.
Secured bonds are backed by a certain issuer asset, and the proceeds from its sale, in case of insufficient funds, will be used to settle the outstanding debt.
By seniority, bonds are divided into:
- Senior;
- Junior.
Senior debt has a higher priority than junior debt. In addition, bonds can be further subdivided by lien: first lien, second lien, and so on, where the first lien takes precedence.
So, for example, a senior subordinated unsecured bond would have a higher priority than a junior subordinated unsecured bond, and a senior 1st lien secured bond would have a higher priority than a senior secured 2nd lien or a senior unsecured bond.
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