Intercreditor Agreement

Intercreditor agreement (also called an intercreditor deed or interlender agreement) is a legally binding contract between two or more lenders that defines the relative priority of their claims against a common borrower. The agreement establishes which lender holds senior position and which holds junior or subordinate position, and it dictates how collateral proceeds, payments, and enforcement rights are allocated between the parties.

In commercial financing, intercreditor agreements arise whenever a borrower has multiple layers of debt. For example, a business may have a senior secured term loan from a bank and a mezzanine loan from a private lender. The intercreditor agreement between these two creditors specifies that the senior lender receives full repayment before the junior lender collects, restricts the junior lender's ability to take enforcement action independently, and establishes standstill periods during which the junior lender must wait before exercising remedies.

These agreements typically address payment waterfalls, lien priorities, standstill provisions, cure rights, and the conditions under which each lender may accelerate its debt or foreclose on collateral. They are negotiated directly between the lenders, though the borrower is usually a party to the agreement and bound by its terms.

Intercreditor agreements are distinct from subordination agreements, which primarily address payment priority. An intercreditor agreement is broader in scope, covering enforcement rights, information sharing, voting on restructuring proposals, and the mechanics of collateral release or disposition.

For borrowers pursuing layered capital structures, the intercreditor agreement is one of the most consequential documents in the transaction. It directly controls what happens when financial distress occurs, including whether a junior lender can force a liquidation, whether the borrower gets breathing room to restructure, and how asset sale proceeds flow. A poorly negotiated intercreditor agreement can leave a borrower trapped between competing lender demands with no workable path to resolution.

The terms of the intercreditor agreement also affect the cost and availability of junior capital. Mezzanine lenders and subordinated debt providers price their risk partly based on the rights they retain under the intercreditor framework. Aggressive standstill periods or broad senior lender control provisions reduce the junior lender's recovery prospects, which translates to higher interest rates or a refusal to lend altogether. Borrowers benefit from understanding these dynamics because the intercreditor terms negotiated between lenders directly impact financing costs and flexibility.

In SBA lending, intercreditor issues arise when borrowers have existing debt alongside a new SBA-guaranteed loan. The SBA requires its lender to maintain certain priority positions, and any existing creditors may need to enter into standby or subordination arrangements. Understanding how intercreditor provisions interact with SBA program requirements is critical for borrowers pursuing government-guaranteed financing alongside conventional debt.

Ignoring the intercreditor agreement during loan negotiations. Borrowers often focus exclusively on the loan agreement terms (rate, covenants, maturity) and treat the intercreditor agreement as a lender-to-lender matter. This is a serious oversight. The intercreditor agreement can restrict the borrower's ability to refinance junior debt, make voluntary prepayments, or obtain additional financing without senior lender consent.

Failing to negotiate standstill period length. Standstill provisions prevent the junior lender from taking enforcement action for a specified period after a default, typically ranging from. Borrowers and junior lenders who accept excessively long standstill periods may find themselves unable to protect their interests during a prolonged workout.

Overlooking the "buy-out" or "purchase option" clause. Many intercreditor agreements include a right for the junior lender to purchase the senior debt at par in a default scenario. Missing or poorly drafted purchase options can eliminate one of the junior lender's most important protective mechanisms.

Assuming all intercreditor agreements are standardized. While certain provisions are market-standard for specific deal types, intercreditor agreements are heavily negotiated and can vary dramatically. The rights of a mezzanine lender under a unitranche structure differ substantially from those under a traditional senior/mezzanine split. Each agreement must be reviewed on its own terms.

Confusing intercreditor agreements with subordination agreements. A subordination agreement primarily addresses payment priority and lien ranking. An intercreditor agreement is more comprehensive, covering enforcement standstills, cure rights, voting on restructuring plans, collateral access, and information sharing. Treating them as interchangeable can leave critical rights unaddressed.