CFA Level I · CFA Level I Exam · Credit Risk
In a liquidation in which the absolute priority rule is followed, which of the following creditors is most likely to have the highest expected recovery rate?
First-lien secured lenders are most likely to have the highest recovery. They hold a claim on specific collateral and rank first in the priority of claims, ahead of senior unsecured and subordinated bondholders, who are paid only after more senior claims are satisfied in full.
- ASenior unsecured bondholders
- BFirst-lien secured lendersCorrect
- CSubordinated bondholders
Explanation
Under the absolute priority rule, claims are paid in order of seniority. Secured first-lien lenders have a claim on specific collateral and rank ahead of senior unsecured and subordinated creditors, so their expected recovery is highest. Subordinated bondholders are paid last among the three.
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