As more and more businesses seek funding to expand their operations, intercreditor agreements have become an essential part of the lending process. But what exactly is an intercreditor agreement?
In simple terms, an intercreditor agreement is a legal contract between two or more lenders who have provided financing to the same borrower. This agreement outlines the terms and conditions of the lending relationship, including the priority of payments and other rights and responsibilities of each lender.
Intercreditor agreements are particularly common in situations where a borrower has taken on multiple types of debt, such as a senior secured loan and a subordinate mezzanine loan. In such cases, the intercreditor agreement determines the order in which each lender is paid back in the event of a default.
One important provision of an intercreditor agreement is the “waterfall” clause, which sets out the order in which each lender is entitled to receive payments. Typically, the senior lender is paid first, followed by any subordinate lenders. This ensures that the lender with the greatest risk (i.e. the senior lender) is the first to be compensated.
Another key component of an intercreditor agreement is the “standstill” provision, which prevents subordinate lenders from exercising their rights in the event of a default by the borrower. Essentially, this means that the subordinate lender cannot take any action (such as foreclosing on collateral) until the senior lender has been paid in full.
Intercreditor agreements also often include provisions related to information sharing, dispute resolution, and the enforcement of rights and remedies in the event of a default.
In summary, an intercreditor agreement is a crucial element of any multi-lender financing arrangement. By clearly defining each lender`s rights and responsibilities, these agreements help to minimize conflicts and ensure that all parties are treated fairly in the event of a default.