In general, a lien is a lender’s legal right to a borrower’s property to guarantee repayment. For example, a bank may seize the borrower’s car if the car loan is not repaid, for example.
Generally, in the context of municipal bonds, debt is backed by a lien on revenues, and not on the asset financed. Although multiple bond issues may be repaid from the same revenue sources such as water or sewer revenues, the payment of some issues may take priority over others in case of revenue shortfalls or insolvency.
· Senior lien bonds have a priority claim on revenues pledged for debt service and take precedence over other debt.
· Junior lien bonds, also called second lien bonds or subordinate lien bonds, are subordinate to other bonds with a more senior claim on revenues for debt service and would be repaid after other debt.
· Parity bonds have the same priority claim on revenues for debt service; in other words, none of the individual bond issues takes priority over the others.
