An Intercreditor Agreement is a legally binding document that outlines the rights and priorities of two or more creditors who have a financial interest in the same borrower. These agreements are commonly used in complex financing arrangements where multiple lenders provide different types of loans or credit facilities to the same borrower. The intercreditor agreement establishes the order of repayment, the distribution of proceeds from the borrower’s assets, and the relationship between the creditors in the event of default, bankruptcy, or other significant financial events involving the borrower.

Key Aspects of an Intercreditor Agreement:

1. Purpose of an Intercreditor Agreement:
   • Clarify Rights and Priorities: The primary purpose of an intercreditor agreement is to clearly define the rights, obligations, and priorities of each creditor involved in the financing arrangement. This helps prevent disputes and conflicts among creditors, especially in situations where the borrower faces financial difficulties.
   • Establish Payment Order: The agreement determines the order in which creditors will be repaid from the borrower’s assets, typically prioritizing senior lenders (those with higher priority) over junior or subordinated lenders (those with lower priority).
   • Manage Risks: By outlining the terms under which each creditor can enforce their rights, the intercreditor agreement helps manage risks associated with the borrower’s potential default or insolvency, ensuring a more orderly resolution process.
2. Common Situations Requiring an Intercreditor Agreement:
   • Senior and Subordinated Debt: In cases where a borrower has both senior debt (which has priority in repayment) and subordinated debt (which is repaid after senior debt), an intercreditor agreement is necessary to establish the hierarchy of claims.
   • Syndicated Loans: When multiple lenders participate in a syndicated loan, where a group of lenders provides a large loan to a borrower, an intercreditor agreement may be used to define each lender’s rights and obligations, as well as the role of the lead lender or agent bank.
   • Mezzanine Financing: In transactions involving mezzanine financing, where a lender provides subordinated debt that ranks below senior debt but above equity, an intercreditor agreement is crucial to delineate the relationship between senior and mezzanine lenders.
3. Key Provisions of an Intercreditor Agreement:
   • Priority of Claims: The agreement specifies the ranking of each creditor’s claims against the borrower’s assets. Senior creditors typically have first priority, followed by subordinated or junior creditors.
   • Payment Waterfall: The agreement outlines the “waterfall” structure, detailing the order in which payments from the borrower or proceeds from the sale of assets will be distributed among the creditors.
   • Standstill Provisions: These provisions may prevent junior creditors from taking enforcement actions (such as initiating foreclosure or bankruptcy proceedings) for a specified period, allowing senior creditors to exercise their rights first.
   • Subordination of Debt: The agreement may require subordinated creditors to agree that their claims are secondary to those of senior creditors and that they will not seek repayment until the senior debt has been fully satisfied.
   • Rights to Collateral: The agreement defines each creditor’s rights to the collateral securing the debt. For example, it may specify that senior creditors have exclusive rights to certain assets in the event of default.
   • Voting Rights and Amendments: The agreement may outline the procedures for decision-making among creditors, including voting rights on matters such as amendments to the loan terms, waivers, or enforcement actions.
4. Benefits of an Intercreditor Agreement:
   • Avoidance of Conflicts: By clearly defining the rights and priorities of each creditor, the intercreditor agreement helps avoid conflicts and legal disputes that could arise if multiple creditors attempt to enforce their claims simultaneously.
   • Structured Resolution: In the event of default or insolvency, the agreement provides a structured process for resolving claims, ensuring that creditors’ rights are respected according to the agreed-upon hierarchy.
   • Transparency and Predictability: The agreement provides transparency and predictability for all parties involved, allowing them to understand their position and potential recoveries in different scenarios.
5. Challenges and Considerations:
   • Negotiation Complexity: Negotiating an intercreditor agreement can be complex, as it involves balancing the interests of multiple creditors with different levels of risk tolerance and investment priorities.
   • Enforcement: The effectiveness of an intercreditor agreement depends on its enforceability in the relevant legal jurisdiction. Creditors must ensure that the agreement complies with local laws and can be upheld in court if necessary.
   • Changes in Circumstances: Changes in the borrower’s financial condition, additional financing, or modifications to the original loan terms may require amendments to the intercreditor agreement, which can be challenging to negotiate.
6. Example of an Intercreditor Agreement in Practice:
   • A company secures a $10 million senior loan from a bank and a $5 million subordinated loan from a private equity firm. The bank, as the senior lender, has first priority in repayment, while the private equity firm, as the subordinated lender, agrees to be repaid only after the senior loan is fully satisfied. The intercreditor agreement outlines the rights of each lender, the payment order, and what actions each lender can take in the event of the borrower’s default. The private equity firm agrees to a standstill period, during which it cannot take enforcement action, giving the bank time to recover its loan.
7. Legal and Regulatory Considerations:
   • Legal Jurisdiction: The enforceability of an intercreditor agreement depends on the legal jurisdiction in which it is governed. Creditors should ensure that the agreement is drafted in compliance with applicable laws and can be enforced in the event of a dispute.
   • Regulatory Compliance: In some cases, regulatory authorities may impose requirements or limitations on the terms of an intercreditor agreement, particularly in highly regulated industries or in cross-border transactions.

In summary, an Intercreditor Agreement is a crucial document that defines the rights, priorities, and obligations of multiple creditors involved in financing the same borrower. It helps prevent conflicts by establishing clear rules for repayment, enforcement actions, and the distribution of proceeds in the event of default or insolvency. While these agreements provide structure and clarity, they can be complex to negotiate and require careful consideration of legal and regulatory factors to ensure enforceability and fairness among all parties involved.