What is one reason convertibles rank above equity during liquidation?

Convertibles rank above equity during liquidation primarily because they provide bond security. This means that convertible securities, which are a hybrid between debt and equity, offer investors the benefits of bonds while also providing the option to convert into equity under certain conditions.

In the event of liquidation, bondholders, including holders of convertible securities, have a higher claim on the company’s assets compared to equity shareholders. This hierarchical structure means that their investments are more secure and they are more likely to recover some portion of their investment before equity holders see any returns.

The ability to convert to equity adds another layer of attraction, providing potential upside if the company's stock performs well post-liquidation. Therefore, convertible securities are considered lower risk relative to common equity during times of financial distress, aligning them higher in the capital structure during liquidation scenarios.