In CFA Level II Fixed income - reading 36 Types of CDS section (2.1), it says “…the reference obligation is not the only instrument covered by the CDS. Any debt obligation issued by the borrower that is pari passu (ranked equivalently in priority of claims) or higher relative to the reference obligation is covered.”
At the same type, in (2.3) Credit and Succession Events, it says “Another credit event recognized in standard CDS contracts is failure to pay, which occurs when a borrower does not make a scheduled payment of principal or interest on any outstanding obligations after a grace period, without a formal bankruptcy filing.”
Based on these two statements, I’m confused on what exactly pari passu default refers to. From the failure to pay section, it seems like any payment failure of the bond issuer - e.g. a subordinated debt payment failure could trigger the credit event and then we need to use cheapest to deliver method to calculate estimated payoff. However, from the pari passu default part, it seems like it is saying only the default on the same seniority and higher debt would trigger a default. Can anyone explain which one to use and did I misunderstand anything?
Thanks in advance.