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A Pragmatist’s Guide to Leveraged Finance: Credit Analysis for Bonds and Bank Debt by Robert S. Kricheff

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15. Structural Issues: Ranking of Debt

What’s in this chapter:

• How typical debt rankings work

• Why security language can be misleading

• Why and how structural subordination can circumvent traditional rankings

• How subsidiary guarantees can circumvent traditional rankings

Debt securities have a ranking that refers to the securities’ priority. You might wonder why this ranking matters as long as all the tranches of debt get paid the respective interest and principal payments they are owed. The primary answer is because sometimes things go wrong. The most wrong they can go is usually bankruptcy.

In bankruptcy, the more senior, or higher-ranking, securities are given the highest priority in getting repaid. Thus, theoretically they have the right ...

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