How Does an Intercreditor Agreement Work

An intercreditor agreement is an essential document that outlines the rights and responsibilities of multiple creditors who have a stake in a borrower`s assets. This agreement is particularly crucial in cases where there are different types of creditors, such as senior lenders, mezzanine lenders, and subordinate lenders. Understanding how an intercreditor agreement works can be beneficial for any business owner or investor who wants to gain a better understanding of how multiple lenders can work together to finance a project.

The intercreditor agreement is typically initiated when a borrower seeks financing from multiple lenders. The document outlines how these lenders will cooperate and interact with one another in the process. One of the most critical aspects of the intercreditor agreement is the “waterfall” provision, which defines the order in which each creditor will be paid in case of default or bankruptcy. The agreement also specifies how much of the borrower`s assets each creditor will have access to, and under what conditions.

The intercreditor agreement also determines the rights of each creditor when it comes to making decisions related to the borrower`s assets. For instance, senior lenders usually have priority in making decisions related to the borrower`s assets, while mezzanine lenders can only make decisions when the senior debt has been satisfied. The subordinate lenders, on the other hand, may only have a say in decisions related to their specific collateral.

Another critical aspect of the intercreditor agreement is the subordination provision. This provision outlines the order in which the different types of debt will be paid off. Senior lenders are usually the first to be paid in cases of default or bankruptcy, followed by mezzanine lenders, and finally subordinate lenders. The agreement also specifies the interest rates, fees, and other terms of each creditor`s loan.

Overall, an intercreditor agreement is a complex document that requires careful drafting and negotiation. It is essential to consult an experienced attorney to ensure that the agreement is enforceable and meets the specific needs of all parties involved. Once the intercreditor agreement is in place, all lenders should work together to ensure that the borrower`s assets are protected and that the loan is repaid in a timely manner. With the right intercreditor agreement, multiple lenders can work together to finance a project and minimize the risks associated with lending to a single borrower.