Intercreditor Agreement
An intercreditor agreement is a contract among creditor groups, agents or collateral representatives that establishes their relative rights with respect to shared collateral, payment priority, enforcement, releases and other creditor-to-creditor matters.
Intercreditor agreements solve conflicts among secured creditors
When multiple creditor groups hold liens on the same assets, each group cannot independently control enforcement without creating conflict. The intercreditor agreement establishes a hierarchy and decision framework before distress occurs.
Lien priority is only one part of the document
A typical agreement can address which collateral agent controls remedies, whether junior creditors face a standstill, how insurance or asset-sale proceeds are applied, and when liens can be released. These provisions can affect restructuring leverage even when nominal lien rankings are already known.
Pari passu creditors also need coordination
Equal-priority lenders still need rules for collateral administration and proceeds sharing. A pari passu intercreditor arrangement can designate one collateral agent, establish shared enforcement procedures and prevent one equal-ranking class from unilaterally seizing common collateral.
Junior creditors can retain rights despite standstill provisions
Second-lien creditors may be restricted from enforcing collateral for a period while first-lien creditors control remedies. The exact agreement can preserve rights to file claims, receive certain payments, object to specified actions or exercise remedies after the standstill expires.
Why the document matters in a restructuring
Assume first-lien and second-lien creditors both have liens on the same business assets. If the company defaults, the intercreditor agreement may let the first-lien agent direct a sale, require the junior group to wait, and specify that sale proceeds go first to the senior secured obligations. Those mechanics can shape negotiation leverage before any court determines ultimate value.
Common mistakes
Treating the intercreditor agreement as a borrower covenant Its central function is creditor-to-creditor rights.
Assuming second lien means no enforcement rights Rights may be delayed or constrained, not eliminated.
Ignoring the document until default It can determine bargaining power long before a restructuring is completed.
Example
A company has first-lien notes, a first-lien revolver and second-lien notes. The first-lien instruments share collateral on an equal-priority basis, while a first-lien/second-lien intercreditor agreement states that first-lien claims receive shared collateral proceeds before second-lien claims.
Example
A company has first-lien notes, a first-lien revolver and second-lien notes. The first-lien instruments share collateral on an equal-priority basis, while a first-lien/second-lien intercreditor agreement states that first-lien claims receive shared collateral proceeds before second-lien claims.
Professional note
The credit agreement tells what the borrower promised. The intercreditor agreement often tells which creditor actually controls collateral enforcement when the borrower is distressed.
Related terms
- First-Lien Debt
First-lien debt is secured debt that holds the first contractual lien priority over specified collateral, subject to permitted liens, equal-priority obligations and the governing intercreditor and security documents.
- Second-Lien Debt
Second-lien debt is secured debt whose lien on specified shared collateral ranks behind first-lien obligations under the applicable security and intercreditor arrangements.
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