Capital Stack

Last Updated: Jun 6, 2019

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The legal organization of all of the capital placed into a company or secured by an asset through investment or borrowing. The capital stack determines who has legal rights to certain assets and income, who receives priority of payment in the event of an uncured default, and in which order each party may be repaid or given authority to take over or liquidate assets in the event of a bankruptcy.

The stack is described as containing the most risk at the top, traveling down the stack to the position with the least risk. Higher positions in the stack expect higher returns for their capital because of the higher risk. Lenders and equity stakeholders are highly sensitive to their position in the stack. Typically, the stack is arranged as follows.

Most risk to least risk:
-Equity
-Unsecured debt
-Junior or second lien debt
-Senior secured debt