Intercreditor Agreements: A Vital Piece of the Lending Puzzle
When multiple lenders are involved in a complex financing deal, an intercreditor agreement is often used to define the relationship and priorities among the lenders. An intercreditor agreement ensures that all parties involved are on the same page and that there is a clear understanding of what will happen in the event of a default.
What is an Intercreditor Agreement?
An intercreditor agreement is a legally binding contract between two or more creditors that outlines their respective rights and obligations with respect to a borrower. This agreement is designed to govern the relationships between the creditors and to ensure that their claims to the borrower’s assets are properly coordinated.
The intercreditor agreement outlines the priority of the creditors’ claims to the borrower’s assets in the event of a default. It also sets out the procedures for enforcing those claims, as well as the rights of the creditors to take action against the borrower.
Types of Intercreditor Agreements
There are several types of intercreditor agreements that can be used depending on the particular financing structure. Some common types of intercreditor agreements include:
1. First Lien/Second Lien Agreements: In this type of agreement, the first lien lender holds the primary claim to the borrower’s assets, while the second lien lender has a secondary claim. If the borrower defaults, the first lien lender has the right to seize the assets before the second lien lender.
2. Senior/Subordinated Agreements: In this type of agreement, the senior lender has the first claim to the borrower’s assets, while the subordinated lender has a lower priority claim. The subordinated lender agrees not to take any action against the borrower until the senior lender’s debts have been satisfied.
3. Mezzanine Agreements: In a mezzanine financing structure, the lender provides financing in the form of debt or equity that is subordinated to senior debt, but above common equity. Mezzanine intercreditor agreements are used to define the relationships and priorities between the mezzanine lender and the senior and junior debt lenders.
Why Are Intercreditor Agreements Important?
Intercreditor agreements are important because they establish the relationships and priorities among the lenders involved in a complex financing deal. Without an intercreditor agreement, there can be confusion and disputes among the creditors when it comes to enforcing their claims against the borrower.
An intercreditor agreement also provides protection for the borrower by helping to ensure that all of the creditors are acting in a coordinated manner. The agreement sets out the procedures for resolving disputes, and it outlines the rights of the borrower in the event of a default.
Intercreditor agreements are a vital piece of the lending puzzle in complex financing deals. They help to define the relationships and priorities among the lenders involved and ensure that their claims to the borrower’s assets are properly coordinated. Without an intercreditor agreement, there can be confusion and disputes among the creditors, which can lead to costly and time-consuming legal battles. Therefore, it is essential to have a well-drafted intercreditor agreement in place to protect all parties involved in the lending transaction.