What Is an Intercreditor Agreement and Why It Matters

Why intercreditor agreements matter

An intercreditor agreement (ICA) clarifies the competing rights of multiple lenders that have claims against the same borrower or the same collateral. Without an ICA, creditors can end up in expensive disputes, inconsistent enforcement, and delayed recoveries that reduce recoverable value for everyone.

In my practice advising both borrowers and lenders, I’ve seen how a well-drafted ICA prevents costly delay and preserves value—especially when a borrower is subject to secured bank loans, mezzanine loans, bondholders, or equipment financings. ICAs are routine in syndicated loans, venture-backed businesses with multiple debt investors, and structured project financings.

Authoritative context: secured-party rights often come under Uniform Commercial Code (UCC) Article 9 (secured transactions), and debtor-in-possession (DIP) and priming issues arise under the U.S. Bankruptcy Code (see 11 U.S.C. §364). For background on secured transactions and bankruptcy priorities, see Cornell’s Legal Information Institute on UCC Article 9 and §364 (UCC Art. 9, Cornell LII; 11 U.S.C. §364, Cornell LII). Financial market regulators such as the SEC and FINRA publish investor guidance related to debt securities and disclosures (SEC; FINRA).

How an intercreditor agreement typically works

An ICA is a negotiated written agreement among creditors that sits alongside each creditor’s loan or security documents. Typical functions include:

• Establishing seniority and subordination (who is “first lien” vs. “second lien” or “junior”).
• Defining the collateral subject to shared or separate security interests and how proceeds will be distributed (the waterfall).
• Setting standstill and forbearance periods that restrict junior lenders from taking enforcement action for a defined time after a default by the borrower.
• Allocating control rights over enforcement, remedies, and decisions (e.g., who can appoint a receiver, accelerate debt, or sell collateral).
• Addressing payment-blocking mechanics and conditional releases when proceeds become available.
• Covering bankruptcy-related remedies: consent to priming liens, roll-ups, or treatment of DIP financing.

Example: A bank holds a senior secured loan and a mezzanine fund holds subordinated debt. The ICA says the bank has first claim on collateral proceeds and that mezzanine holders must wait (or take a portion of recoveries) until senior claims are paid in full. It may also create a limited period where mezzanine lenders cannot foreclose while the senior lender negotiates a workout.

Key provisions you should expect to see

Below are the provisions lenders and borrowers negotiate most often. Each provision affects risk allocation and the speed of recovery.

• Priority and ranking language: Clear statements about who is “senior” and who is “subordinated” and whether the ranking is based on lien perfection date, agreement date, or contract terms.
• Standstill/forbearance periods: Time-limited restrictions preventing junior creditors from enforcing remedies while senior creditors pursue their remedies or restructure the debt.
• Payment waterfall and payment-blocking: Mechanisms that route available cash to the senior lender first, including a process for resolving blocked payments and using an escrow or agent to distribute proceeds.
• Collateral sharing and collateral releases: Rules on which collateral is shared, how releases happen (e.g., partial releases after a sale), and procedures for additional collateral.
• Enforcement control and intercreditor agent: Who has sole control to enforce, and whether an agent represents the group of lenders.
• Subordination exhibits and subordination certificates: Written evidence that a creditor’s claim is subordinated to another specified claim.
• Bankruptcy and DIP financing clauses: How parties will treat financing that primes existing liens (often requires court approval) and whether subordinated creditors will consent to roll-ups.
• Cure, waiver, and amendment mechanics: Who must consent to material changes in the ICA or the underlying loan documents.

Common negotiation points and risks

• Scope of collateral: Broad collateral definitions favor senior lenders. Borrowers often push to exclude certain assets (e.g., IP, receivables) from sharing.
• Remedies control: Junior lenders want the right to enforce in defined circumstances; senior lenders want the exclusive right to lead enforcement.
• Duration of standstill: Longer standstills protect the senior lender’s workout but expose junior lenders to loss if the borrower’s value declines.
• Subordination “waterfall” precision: Vague waterfall rules create disputes when proceeds are split. Define waterfall events, timing, and calculation methods.
• Bankruptcy carve-outs: Courts can approve DIP financing that primes prepetition liens; ICAs may contractually waive objections but the Bankruptcy Code limits the enforceability of some waivers. See 11 U.S.C. §364 for DIP financing rules (11 U.S.C. §364, Cornell LII).

Practical implications for borrowers and creditors

For lenders

• Senior lenders secure recovery and control workouts, reducing credit losses; however, they take on the negotiation burden and may accept indemnities or covenants.
• Junior lenders accept higher risk and higher pricing; they must weigh the value of subordination against expected returns.

For borrowers

• ICAs can limit flexibility: a borrower may need multiple creditor consents to refinance, sell assets, or add new debt.
• Borrowers should seek carve-outs that allow operational needs (e.g., working capital) and aim for clear release mechanics for collateral.

In practice, I counsel borrowers to push for clear release milestones and shorter standstill periods. For lenders, I recommend precise waterfalls, strong perfection mechanics (per UCC Article 9), and clear consent thresholds for amendments.

Interaction with subordination agreements and syndication

Intercreditor agreements are closely related to subordination agreements. A subordination agreement is often an exhibit to an ICA or a standalone document that expressly puts one creditor’s claims behind another’s.

When loans are syndicated, an intercreditor agreement helps multiple lenders—often with different risk appetites and documentation standards—work together. See our related guides: [Intercreditor Agreements: What Borrowers Should Know](