In this example, Copper Inc. has assets of 300 million financed by two pari passu loans of 125 million each and equity of 50 million. Copper Inc. has now gone into liquidation and its liquidators are able to achieve a recovery rate on those assets of 80%, meaning that the assets that we thought were valued at 300 we've been able to sell onto other people and receive 240 million for them. This 240 million, first of all needs to go to the debt holders of the company, those two pari passu loans, and because they are on a pari passu basis, they both get an equal amount out of this. So I'm gonna put a minimum function in here, equal to either the 125 size of the loan or the recovery amount of the assets divided by two. If that is more than the size of the loan, then we'll be able to have the loan repaid in full. However, in this instance, the recovered asset value of 240 million is not enough to cover both of those loans that are on an equal footing with each other, they're pari passu. So as a result, both of these two debt holders will not get back their full 125 but instead get 120 each. The equity holders will get back a minimum of zero or the assets amount minus the sum of everything that's been paid out already, the 240 that's paid out to those two loan holders. As a result, there's nothing left over for the equity holders and the total recovered amount is the 240 that's paid out to the two loans.

In the second scenario, it's the same setup except for the fact that those two loans are not on a pari passu basis anymore. Instead, we have one 1st lien senior loan who ranks over the 2nd senior secured loan in the event of default. So same setup to begin with. There's 300 million of assets we think, but the liquidators can only recover 80% of that value, giving us 240 million. And then this first of all goes to the 1st lien loan. So they're either gonna get back the whole 125 of their loan or the total recovered amount. And since the assets that we have are 240 million and they are only owed 125, they'll get the full 125 back. The 2nd lien loan, however, is only gonna get whatever's left over. So they're, again, gonna be looking at a minimum function but it's the minimum of the 125 that they're owed and the total asset amount minus what's already been paid out to the 1st lien loan. As a result, they only get 115 coming back to them. And then if we extend this to the equity holders, we'll see that they, again, get nothing back. We take the assets amount and subtract from that everything that's been paid out to other debt holders of the business, there's zero left over for the equity holders here. Overall we can see that 240 million has been paid out but not equally to the 1st and 2nd lien loans 'cause the 1st lien loan has priority over the 2nd lien loan which is subordinated, and as a result gets less back.