What Happens When A Company Defaults

Liquidation is the process by which a company (or part of a company) is brought to an end, and the assets and property of the company are redistributed.

Liquidation is also sometimes referred to as winding-up or dissolution, although dissolution technically refers to the last stage of liquidation.

The main purpose of a liquidation where the company is insolvent is to collect its assets, determine the outstanding claims against the company, and satisfy those claims in the manner and order prescribed by law.

Generally, the priority of claims on the company's assets will be determined in the following order:

Prority of claims:
Liquidators costs
Creditors with fixed charge over assets
Costs incurred by an administrator
Amounts owing to employees for wages/superannuation
Payments owing in respect of workers's injuries
Amounts owing to employees for leave
Retrenchment payments owing to employees
Creditors with floating charge over assets
Creditors without security over assets (Unsecured bonds)
Shareholders (Liquidating distribution)

=> If you are holding onto an unsecured bond, you are only rank higher than equity shareholders.
=> This means if the bond defaults, bond investors are probably not going to get back anything substantial.
=> Hence we place a lot of emphasis on the safety of bond issuers.
=> If we have to choose between duration risk or issuer risk, we will choose duration. This is because duration risk will only result in mark to market losses. A bad issuer can result in permanent loss of capital.

Source: https://en.m.wikipedia.org/wiki/Liquidation