Claims on a corporation's assets can be broken down into equity, debt and "other," where "other" might include taxes, accounts payable or worker wages. Priority (or seniority) refers to the order in which claims are to be paid in a liquidation of the firm—no part of a claim can be paid unless all more senior claims are fully paid. The inverse of seniority is subordination. The less senior a claim is, the more subordinated it is. Common stock is the most subordinated claim on a corporation's assets. In a liquidation, common stock holders receive nothing unless all other claims are paid in full. In that case, the common stock holders receive whatever is left. For this reason, common stock may be called a residual claim. Preferred stock is senior to common stock but subordinated to other claims. Things are more involved with debt because there can be secured debt and unsecured debt. Secured debt is collateralized with certain, specific assets of the corporation. If multiple claims are secured by the same collateral, a priority may be specified among them. Unsecured debt is backed by the general assets of the corporation. It may be broken down into senior and subordinated debt. Mezzanine finance is a catch-all term covering various subordinated financing arrangements that include some element of equity. It includes subordinated debt issued with warrants, convertible subordinated debt, and preferred stock. Mezzanine capital is often used in late-stage venture capital or leveraged buyouts. Unsecured bonds are called debentures. Bank loans are generally secured or senior unsecured debt. Another name for subordinated debt is junior debt. Laws vary from one jurisdiction to the next, but items such as taxes or workers' wages are generally senior to debt or equity. Insolvency does not always result in liquidation. An alternative is reorganization, in which the firm's obligations may be renegotiated. The size of debts may be reduced. Their terms may be extended, or other provisions may be modified to improve the insolvent firm's financial condition. Reorganizations are negotiated as entire packages, which gives subordinated creditors negotiating leverage. Accordingly, priority is not strictly adhered to, with concessions spread somewhat more evenly across senior and subordinated claims.
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