In a default/bankruptcy which bonds are paid off first?

Factual Questions
1

In a 1. default 2. bankruptcy which bonds are paid off first? What is the pecking order in terms of getting paid?
I look forward to your feedback.
davidmich

2

Generally older (earlier issued) bonds take precedence over later bonds, not because they’re older, but because their bond contracts will have clauses (called indentures) that describe their seniority. A typical indenture will say this bond has seniority over later issued bonds. However a later bond could have first came to specific assets. For example a bond used to purchase a piece of equipment might have first claim against that specific item.

So for example if a company has $900 in cash and a machine that’s worth $800 and it owes $1000 to to different bonds. It would pay $1000 to the senior bond and $700 to the junior bond, unless the junior bond had a specific mortgage against the machine in which case the bonds would get $900 and $800.

Of course these right can always be changed by negotiation, and that usually happens in a bankruptcy. If the firm is not being liquidated, it has to be valued to see how much each claimant should get and then new securities will be issued which are valued at that amount. This is hard and not exact work. Senior claimants might, and often do, take less than they think they are entitled do simply to get the bankruptcy fully settled.

Argentina is currently going through a very prolonged default proceedings because some but not all of the bondholders have agreed to the restructuring and these holdout bondholders are fighting in court.

3

Sorry duplicate post

4

So bond payment pecking order focuses only on the age of the bond (senior or junior bonds), not on the type of bond eg. secured or unsecured bonds?
davidmich

5

No. Secured bonds have priority, but only over the assets by which they are secured. In oldguy’s example the later-issued bond is a secured bond; it has a security over the machinery. So the entire proceeds from realising the security (i.e. the $800 raised by selling the machinery) go to the later-issued bond.

If selling the machinery had raised $1200, then the secured bond would have been paid in full (i.e. $1000) and the remaining $200 would have been added to the pool of assets available to the unsecured bondholders.

6

Thank you Old Guy and UDS. Very helpful.
davidmich