Why Is an Intercreditor Agreement Important?
Multiple creditors can have different economic interests in the same borrower. A senior secured lender may expect repayment before a subordinated lender, while the junior lender may have separate rights concerning amendments, enforcement, or access to information. An intercreditor agreement documents how those competing rights operate together.
For example, if a company has $10 million of senior secured debt and $3 million of subordinated debt, the agreement can establish that proceeds from collateral realization first satisfy the senior lender's permitted claims before amounts are distributed to the junior lender, subject to the negotiated terms.
Key Provisions of an Intercreditor Agreement
The precise provisions depend on the financing structure, but an agreement commonly addresses the following areas:
- Payment priority: Establishes which creditor receives specified payments or recovery proceeds first.
- Collateral rights: Defines interests in shared collateral and how security interests interact.
- Enforcement: Sets procedures for declaring defaults, enforcing security, and controlling remedies.
- Standstill periods: May restrict a junior creditor from taking enforcement action for a defined period.
- Voting and amendments: Establishes which lender approvals are required for changes affecting creditor rights.
- Information rights: Defines notices, financial information, and other communications shared among lenders.
How an Intercreditor Agreement Works
The agreement is typically negotiated when a borrower has, or expects to have, multiple financing arrangements. The lenders determine their relative priority and agree on the circumstances in which each creditor may exercise contractual or security rights.
Consider a borrower that obtains a senior bank facility and later raises mezzanine financing. The senior lender may retain first-priority rights over specified collateral, while the mezzanine lender receives a subordinated claim. The intercreditor agreement then governs how payments, collateral enforcement, waivers, and recovery proceeds are handled between them.
The document operates alongside the underlying loan and security documents rather than replacing them. Each lender's rights remain connected to its own financing documents, while the intercreditor agreement coordinates those rights where they overlap.
Intercreditor Agreement vs. Other Commercial Agreements
An intercreditor agreement specifically addresses relationships among creditors. Other commercial agreements can serve different purposes. A Csa Agreement, for example, is generally associated with collateral arrangements supporting certain financial transactions and establishes terms for collateral management between counterparties.
An Exclusivity Agreement instead governs an arrangement in which one party receives exclusive rights or the other party agrees to limit dealings with competing parties. Its purpose differs from creditor-priority arrangements.
A Framework Agreement can establish standardized terms for future transactions or an ongoing commercial relationship. Unlike an intercreditor agreement, it does not inherently determine priority among creditors.
Business and Financial Applications
Intercreditor agreements are particularly relevant in leveraged finance, acquisition financing, project finance, real estate lending, restructuring, and transactions involving senior and junior debt. Finance teams can use the agreement to understand how different debt instruments interact and how contractual priority may affect cash distributions.
During financial planning, the agreement can also help management understand restrictions associated with additional borrowing, refinancing, asset sales, distributions, or changes to existing debt arrangements. These provisions can influence financing decisions and the sequencing of payments from available cash flow.
Best Practices for Reviewing an Intercreditor Agreement
Finance and legal teams should review the agreement alongside the underlying credit and security documents. Particular attention should be given to provisions that determine priority, enforcement control, payment restrictions, amendment requirements, and treatment of collateral proceeds.
- Map each creditor's debt, security interests, and contractual priority.
- Identify payment restrictions and permitted distributions.
- Review enforcement rights, standstill periods, and notice requirements.
- Check how refinancing, amendments, waivers, and new debt affect creditor rights.
- Document how collateral proceeds and other recoveries are allocated.
Summary
An Intercreditor Agreement coordinates the rights and obligations of multiple creditors sharing exposure to the same borrower or collateral. By defining payment priority, enforcement procedures, collateral rights, voting arrangements, and information requirements, it provides a structured basis for managing layered financing and supporting informed financial decisions.