An intercreditor agreement, often referred to as an intercreditor deed, is a legal contract that sets out the terms and conditions between two or more creditors who have provided financing to the same borrower This agreement outlines each creditor’s rights and responsibilities in the event of default or bankruptcy of the borrower Intercreditor agreements are commonly used in lending transactions involving multiple lenders, such as syndicated loans, mezzanine financing, and debtor-in-possession financing.
The primary purpose of an intercreditor agreement is to establish the hierarchy of creditor claims in the event of a borrower default This hierarchy determines the order in which creditors will be paid back from the borrower’s assets The agreement also governs how creditors will interact with each other during the enforcement of their rights, including voting rights, sharing of collateral, and decision-making processes.
There are two main types of intercreditor agreements: “senior-subordinated” agreements and “mezzanine-senior” agreements In a senior-subordinated agreement, the senior lender holds a higher priority claim on the borrower’s assets, while the subordinated lender holds a lower priority claim The subordinated lender agrees to wait for repayment until the senior lender has been fully satisfied In a mezzanine-senior agreement, the mezzanine lender provides financing that ranks between the senior lender and the equity investors The mezzanine lender typically has a higher risk profile but expects a higher return on investment.
Key provisions in an intercreditor agreement include the subordination and payment waterfall provisions Subordination provisions establish the priority ranking of each lender’s claims in relation to each other For example, a subordinated lender will agree to subordinate its claims to those of a senior lender inter creditor agreement. Payment waterfall provisions outline the order in which cash flows from the borrower will be distributed to each lender This provision is important in determining the repayment schedule and allocation of proceeds in the event of a default.
Other important provisions in an intercreditor agreement include voting rights, enforcement rights, and collateral sharing arrangements Voting rights give lenders the ability to make decisions collectively, such as approving amendments to the loan agreement or voting on the appointment of a receiver Enforcement rights specify the steps that creditors can take in the event of a default, such as foreclosing on collateral or initiating legal proceedings Collateral sharing arrangements determine how collateral securing the loan will be shared among the lenders, ensuring that each lender’s interests are protected.
Intercreditor agreements are complex legal documents that require careful negotiation and drafting to ensure that all parties’ rights are protected It is essential for borrowers and creditors to seek legal counsel when entering into these agreements to fully understand their implications and obligations Failure to comply with the terms of an intercreditor agreement can lead to disputes between lenders and potential litigation, which can delay the resolution of a borrower default.
In conclusion, intercreditor agreements play a crucial role in lending transactions involving multiple creditors These agreements help establish the rights and responsibilities of each creditor, determine the hierarchy of creditor claims, and govern the interaction between lenders in the event of a default By understanding the key provisions of an intercreditor agreement and seeking legal advice when entering into these agreements, borrowers and creditors can effectively manage their risks and protect their interests.