Capital Absorption Risk · Sponsor and manager economics
Fixed Priority Distributions
Definition
The set sequence in which a project's cash is used, for example operating costs, then senior debt service, then junior debt, then preferred returns, then common equity, so obligations higher in the order absorb cash before anything reaches owners lower down. Agreed subordination among creditors is enforced in bankruptcy to the extent enforceable under nonbankruptcy law[1].
Federal law
A market and contract term. No Act of Congress defines it; the federal laws below apply as described.
- Bankruptcy Reform Act of 1978, Pub. L. 95-598, § 101 (enacting 11 U.S.C. § 510), 92 Stat. 2549. Enforces contractual subordination among creditors in bankruptcy (11 U.S.C. § 510(a)); it does not govern equity waterfalls outside bankruptcy. Official text: govinfo.gov, U.S. Government Publishing Office.
- Bankruptcy Reform Act of 1978, Pub. L. 95-598, § 101 (enacting 11 U.S.C. § 726), 92 Stat. 2549. Sets the statutory default order of distribution in a chapter 7 liquidation (11 U.S.C. § 726(a)). Official text: govinfo.gov, U.S. Government Publishing Office.