Overview

When a borrower uses several lenders—senior banks, mezzanine funds, private credit, or participating lenders—an intercreditor agreement clarifies each party’s legal and practical rights. In my practice, clear intercreditor terms reduce conflict, speed workout negotiations, and preserve asset value when a borrower hits distress.

Key clauses to watch

  • Payment priority / waterfall: Specifies the order and conditions under which cash flows and collateral proceeds are distributed to lenders.
  • Subordination clause: Confirms that junior creditors’ claims are ranked below senior creditors’ claims.
  • Standstill / enforcement moratorium: Temporarily prevents junior creditors from taking enforcement action while senior lenders attempt remedies.
  • Voting and control rights: Defines who controls borrower amendments, waivers, or enforcement decisions, including consent thresholds.
  • Collateral sharing and release mechanics: Explains how collateral is shared and when lenders will release or carve out collateral.
  • Bankruptcy and DIP provisions: Addresses treatment of claims in insolvency, adequate protection, and whether the agreement allows junior lender priming in a Chapter 11 (subject to court approval).
  • Intercreditor remedies and cure rights: Who may cure defaults, and when cross-defaults trigger action.

How priority typically works

Most intercreditor agreements split lenders into senior (first-priority) and subordinate or junior classes. Senior lenders usually get a first-priority security interest in collateral and have primary enforcement rights. Junior lenders accept limited remedies and recovery only after senior claims are satisfied per the waterfall. That allocation reduces uncertainty but also limits junior lenders’ immediate bargaining power.

Practical example

A mid-market company borrows $30M from a bank (senior) and $10M from a private credit fund (subordinated). The intercreditor agreement might give the bank first claim to inventory and accounts receivable, a 180-day standstill preventing the fund from foreclosing, and a defined waterfall that pays the bank in full before the fund receives proceeds.

Bankruptcy and legal context

Intercreditor agreements do not override bankruptcy law: courts can modify priorities under U.S. bankruptcy rules, and debtor-in-possession (DIP) financings may be given priming priority with court approval. Still, a well-drafted intercreditor agreement creates contractual expectations the parties and judges generally respect (U.S. Dept. of the Treasury; see also Investopedia for practical summaries).

Negotiation tips lenders and borrowers should use

  • Negotiate early: Raise intercreditor terms during initial diligence—late changes are harder to secure.
  • Focus on standstill length and carve-outs: Shorter standstills and clearly defined carve-outs (fees, ongoing expenses) improve junior recovery prospects.
  • Include clear collateral release rules: Specify triggers for releasing assets to avoid hold-ups during refinancing.
  • Define voting thresholds: Make decision rules precise to prevent stalemates.

Common mistakes and misconceptions

  • Assuming priority is absolute: Bankruptcy courts and subsequent agreements (like DIP orders) can alter outcomes.
  • Overlooking administrative carve-outs: Operating expenses or professional fees can reduce collateral available to lenders.
  • Vague enforcement timelines: Ambiguous cure or enforcement windows lead to disputes.

When borrowers should care

Borrowers should insist on clarity in intercreditor language because these agreements govern restructuring flexibility, refinancing options, and which lenders must consent to changes. Ambiguous intercreditor terms can block refinancing or slow operations during a workout.

Further reading and internal resources

Author’s note and disclaimer

In my experience, the single biggest driver of post-default outcomes is clarity up front: precise waterfalls, standstills, and collateral-release mechanics. This article is educational and not legal advice. For transaction-specific guidance, consult a qualified attorney and financial advisor.

Authoritative sources

Last updated: 2025. Content is for educational purposes only.