- 1-Definition-and-Purpose
- 2-Senior-vs-Junior-Creditors
- 3-Payment-Priority-Waterfall
- 4-Key-Provisions
- 5-Negotiation-and-Drafting-Tips
- 6-Common-Pitfalls
- 7-Case-Study-Commercial-Loan
- 8-Next-Steps-and-ESPLawyers
1. Definition and Purpose
An intercreditor agreement coordinates rights among multiple lenders to a single borrower, clarifying who gets paid first if the borrower defaults. Understanding intercreditor agreements helps financial managers and legal teams ensure that senior lenders—often banks with larger exposures—maintain priority, while mezzanine or subordinated creditors accept deferred payment. These agreements reduce disputes, protect each lender’s collateral interests, and enable complex financing structures like layered debt in real estate or leveraged buyouts.
1.1 Why They Matter
Without a clear intercreditor framework, competing claims to collateral can tie up asset sales in litigation, eroding recoveries. By defining enforcement rights, voting thresholds, and standstill periods, these agreements streamline workout processes when things go south.
2. Senior vs. Junior Creditors
Intercreditor agreements distinguish senior creditors—whose loans are secured by first-priority liens—from junior creditors, who hold subordinate claims. Senior lenders enjoy the first lien on collateral and the right to credit bid in foreclosure, while junior lenders must wait until senior positions are satisfied. In exchange for taking extra risk, junior creditors often negotiate higher interest rates or equity kickers.
2.1 Rights and Restrictions
Junior creditors’ rights typically include so-called “standstill” periods, during which they cannot accelerate or foreclose on collateral before senior debt is paid. Conversely, senior creditors may veto certain borrower actions, like asset sales or refinancing, to protect their position.
3. Payment Priority Waterfall
The payment waterfall sets the sequence of cash distributions: operating revenues first service senior interest and principal, then administrative expenses, and finally junior obligations. Understanding intercreditor agreements means mapping out each tier’s share under normal operations and distress.
3.1 Example Waterfall Structure
1. Operating expenses and tax obligations
2. Senior debt interest
3. Senior principal amortization
4. Mezzanine interest
5. Mezzanine principal and equity distributions
4. Key Provisions
Intercreditor agreements embed critical clauses. Standstill provisions prevent junior action during default proceedings. Payment block clauses restrict distribution to junior lenders until senior defaults are cured. Pari passu clauses ensure equal treatment among lenders of the same class. Voting thresholds specify the percentage of lenders required to amend terms or release collateral.
4.1 Enforcement Triggers
Common triggers include payment default, covenant breach, or cross-default under other financings. When triggered, senior lenders can enforce remedies while juniors must observe agreed pause periods.
5. Negotiation and Drafting Tips
Successfully negotiating intercreditor agreements requires balancing lender protections with borrower flexibility. Advocate for shorter standstill durations and carve-outs allowing juniors to bid at foreclosure sales. Limiting default definitions to material breaches prevents minor events from blocking junior rights. Include clear exercise procedures for lender actions, and build in escrow structures to manage proceeds smoothly.
5.1 Collaborating with Counsel
Engage specialized teams who recognize subtle regional differences in enforcement procedures. Early involvement of all stakeholders—borrower, senior and junior lenders—avoids later holdouts.
6. Common Pitfalls
Overly broad standstill provisions can trap junior lenders indefinitely. Ambiguous default definitions lead to disputes over enforcement timing. Failing to coordinate with security trustee roles may cause collateral fragmentation. Moreover, neglecting future financings or intercreditor interactions risks unintended subordination of subsequent lenders.
6.1 Avoiding Ambiguities
Use precise language around consent thresholds, remedy allocations, and event-of-default scopes. Include margin for future amendments with clear amendment processes to adapt to changing market conditions.
7. Case Study: Commercial Loan Workout
In a 2023 office complex refinancing, a senior bank providing $100 million faced borrower default. The junior mezzanine investor held $30 million. Their intercreditor agreement gave the senior lender a 90-day standstill. During that period, the borrower restructured operations, secured a replacement senior loan, and repaid the original senior debt in full. Thanks to well-negotiated standstill and collateral release clauses, the junior lender then received a prompt repayment, avoiding a capital write-down.
7.1 Lessons Learned
— Include collateral release triggers tied to full senior repayment.
— Short, objective standstill periods can preserve value.
— Clear waterfall definitions streamline split recoveries.
8. Next Steps and ESPLawyers
Mastering understanding intercreditor agreements empowers lenders and borrowers to structure resilient financings. For tailored drafting support, negotiation strategy, and precedent templates, visit ESPLawyers. Their expert team specializes in complex credit structures, ensuring your agreements align with best practices and protect every stakeholder’s interests.
