Intercreditor Agreement

An intercreditor agreement regulates the relationship between different lenders of a company. It defines who is paid first in a serious case and what rights each party has. This clearly organises the ranking between senior and subordinated lenders. The practical need arises as soon as financing consists of several building blocks, such as senior bank debt, a unitranche, mezzanine, shareholder loans and a working capital facility.

Four core topics are governed. First, payment ranking, meaning the order in which interest and principal flow in the ordinary course and on enforcement. Second, the distribution of enforcement proceeds from security, which is often held by a common security agent. Third, standstill periods under which junior creditors may take no action of their own for a defined time after a default, so that senior creditors retain control. Fourth, who decides in a restructuring and on what conditions junior claims can be released so that a sale of the business becomes possible at all.

In practice the agreement is therefore far more than a formal ranking provision: it determines who holds bargaining power in a crisis. For shareholder loans it should additionally be noted that they rank behind other claims in insolvency in any event. The length of the standstill periods is the most important economic point in negotiation, because it determines how long senior creditors can act alone before junior creditors may take steps of their own. Staggered periods depending on the type of default are customary.