Capital structure

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They asked me where I thought I stood in the organisation. I said I was senior unsecured. They fired me — for insubordination.

Hunter Barkley’s forthcoming The ISDA Protocol (as yet unpublished and, come to think of it, unwritten)

Capital structure
ˈkæpɪtl ˈstrʌkʧə/ (n.)

Of a corporation, the arrangement, priority and ranking of its shareholders, creditors and debentureholders. Usually, common shareholders at the bottom, then preferred shareholders, then subordinated creditors, then unsecured (aka “ordinary”) creditors, then secured creditors.

That kind of thing.

When you have a convoluted corporate structure — hey: who doesn’t? — then the arrangement between the various entities in your group of shareholdings, inter-company loans, parental guarantees and so on can be quite the game of pan-dimensional chess.

The capital structure, charted

Within a given legal entity, as follows:

Name Rank Description
Secured debt First of all, and “super-senior” first among these. Special: gold-leaf toilet seats, ciabatta, truffle oil: you have your own bucket of assets that no one else is allowed to even look at until you have taken what is owed to you.
Senior unsecured debt Pari passu with all “ordinary” creditors, trade creditors, market counterparties, employees, the paper boy, etc. The majority of indebtedness will be senior unsecured. You rank pari passu with everyone else in this bucklet, but get out before the subordinated holders, and certainly before the equity.
Subordinated debt You are technically a creditor, but only just. Paid before shareholders, but your debt claims rank behind senior debt holders, and you may not be able to redeem your debt until all senior debt is paid down: to subordinated debt before senior debt is to prefer the subordinated debt. These are the weird implications of the time function of structural subordination
Preference shares In front of ordinary shareholders, behind everyone else. A form of equity, but where you get some assurance of a return before the common stockholders, (but in return you do not get any equity upside). some funds are structured as pref shares. Not sure why.
Common equity Outright last. Not, technically, a creditor at all, but an owner. Good news: your claim is unlimited; you are not owed anything; when all is said and done, you own it. Bad news: all has to be said and done first. You only get to work out what you own after all the creditors have been at all the company’s assets with the wire-brush and Dettol and taken what’s due to them.