Overview
Intercreditor agreements (ICAs) are the playbook for lenders when two or more parties finance the same borrower. Rather than leaving priorities and remedies to piecemeal negotiation at the moment of distress, an ICA records each lender’s rights up front: who has priority on cash flows and collateral, who may enforce remedies, and how creditor actions are coordinated during workouts or bankruptcies.
In my practice advising on multi‑lender structures, I’ve seen well‑drafted intercreditor agreements speed closings and materially reduce friction when a borrower underperforms. Poorly drafted or absent ICAs, by contrast, commonly produce costly, time‑consuming disputes that erode recoveries and delay restructurings.
(For background on related priority concepts, see our guide to lien and subordination topics.)
Why intercreditor agreements matter
- Establish repayment order and collateral sharing so lenders know where they stand before a default occurs.
- Protect higher‑priority lenders (senior lenders) from actions by subordinated creditors that would reduce recoveries.
- Create “standstill” and consent regimes that temporarily constrain enforcement by junior creditors during workouts.
- Facilitate financing packages with mixed sources—banks, mezzanine financiers, private credit, or bondholders—by creating predictable rules for each party.
Authoritative sources explain the economic and legal role of these documents: industry primers and legal analyses from the SEC, Investopedia, and industry law reviews provide useful framing and examples (see Resources below) (SEC; Investopedia; National Law Review).
Key provisions commonly found in an intercreditor agreement
Below are the clauses that lenders negotiate most frequently. Precise language matters because small differences can change recovery prospects dramatically.
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Priority and Payment Waterfall: Specifies the order in which cash proceeds (operating cash, collateral sale proceeds, bankruptcy recoveries) are distributed among lenders. This section often references the loan documents for senior and junior facilities.
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Collateral Sharing and Perfection: Defines which security interests secure which debt, whether collateral is shared, and who controls releases or replacements of collateral.
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Enforcement Rights and Standstill Periods: Sets whether and when a subordinated lender can exercise remedies (foreclosure, forebearance, set‑off) and whether it must wait while senior lenders act.
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No‑Action/No‑Interference Covenants: Junior creditors often agree not to challenge senior enforcement actions or to limit remedies that reduce senior recoveries.
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Payment Block and Intercept Mechanisms: Procedures for capturing borrower receipts or diverting payments to seniors in specified circumstances.
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Subordination and Payment Interruption: When subordinated debt may be deferred or held in abeyance until senior amounts are satisfied.
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Cure, Amendment and Voting Mechanics: Who must consent to amendments, waivers, or restructurings (typical locks for senior lenders).
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Remedies after Default and Bankruptcy Protections: Language to address priorities in insolvency or cross‑border enforcement; these clauses are tested in bankruptcy courts.
Common types of intercreditor relationships
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Senior/Subordinated: The most common arrangement. Senior lenders take first priority on collateral and cash flow; subordinated lenders accept a lower rank in exchange for higher yield or equity upside (mezzanine or PIK features).
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Pari Passu (pro rata): Lenders share collateral and repayments proportionally; less common when instruments have materially different risk profiles.
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Multiple Tiers: Deals can include senior bank debt, second lien lenders, mezzanine lenders, and unsecured noteholders—each tier requires clear ICA rules.
For practical context, review our glossary entries on subordination and mezzanine financing to understand how these instruments typically interact with ICAs. Useful internal resources: “Subordination Agreement” and “What is Mezzanine Financing?”.
- Subordination Agreement: https://finhelp.io/glossary/subordination-agreement/
- What is Mezzanine Financing?: https://finhelp.io/glossary/what-is-mezzanine-financing/
Negotiation priorities: what each party tries to achieve
- Senior lenders seek: clear payment priority, control over collateral enforcement, limits on junior creditor remedies, and strong cure/consent rights.
- Junior lenders seek: flexibility to receive returns (e.g., PIK, equity conversion), limitations on senior call rights, and clear procedures for amendments so they aren’t stripped of value without consent.
- Borrowers seek: simplicity, minimal lien dilution, and fewer cross‑defaults that complicate operations.
Negotiation levers include the length of standstill periods, scope of collateral sharing, cure rights, and whether juniors receive consent or notice rights for restructurings.
Practical tips and drafting best practices
- Start early: Negotiate intercreditor terms during credit documentation—not as an afterthought. Early agreement avoids last‑minute holdouts that delay closings.
- Define triggers precisely: Use specific, measurable events (payment default of X days, insolvency tests) rather than vague language that invites dispute.
- Map collateral and perfection: Attach a schedule listing all security interests, priority by jurisdiction, and steps for replacements or releases.
- Limit cross‑default breadth: Narrow cross‑default and cross‑acceleration clauses so one small breach in one facility doesn’t topple all financing.
- Build amendment and voting rules: Specify required consents and voting thresholds for waivers and restructurings to avoid ambiguity in a workout.
- Use waterfall examples: Include sample payment waterfall mechanics or formulas so cash application isn’t left to interpretation.
Real‑world examples (anonymized)
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Commercial real estate renovation: A borrower obtained a $10M senior loan and a $3M subordinated lender for renovations. The ICA gave the senior lender the right to be repaid from sale proceeds first, and required the junior to wait 180 days after a senior foreclosure before taking any surplus—this avoided a sprint to liquidate and encouraged a negotiated sale.
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Telecommunications financing: In a $30M multi‑source facility, the ICA included an automatic payment intercept for operating receipts if covenant breaches occurred, which allowed the senior bank to preserve liquidity while a restructuring plan was negotiated.
These situations illustrate how the ICA’s mechanics—not just the headline priority—determine actual recoveries.
Common mistakes and misconceptions
- Mistake: Relying on implicit priorities. Never assume lien priority or enforcement rights are self‑evident—document them.
- Mistake: Vague cure and amendment rules. Ambiguity breeds litigation during rescues and restructurings.
- Misconception: ICAs are only for large deals. Even mid‑market and growth financings benefit from clear intercreditor rules when multiple capital providers participate.
How ICAs interact with bankruptcy and insolvency
Bankruptcy law can override or limit contractual provisions, but a clear ICA often helps courts and stakeholders understand parties’ agreed expectations. Carefully drafted bankruptcy‑safe provisions (e.g., assignment or transfer mechanics, control of collateral sales) reduce the risk of costly litigation in insolvency proceedings. Always evaluate the ICA alongside local insolvency rules and precedence (see SEC and legal analyses in Resources).
Checklist for lenders and borrowers
- Identify all lenders and tiers and list amounts.
- Attach security schedules and perfection evidence.
- Define payment waterfall with examples.
- Specify standstill/forbearance periods and enforcement rights.
- Set amendment, consent, and voting thresholds.
- Include dispute resolution (jurisdiction, governing law, arbitration clauses where applicable).
- Model outcomes under default, liquidation, and solvent sale.
Where to get help
Intercreditor agreements sit at the intersection of finance and law. Engage a lawyer experienced in secured transactions and restructurings plus a lead lender or syndication agent who will monitor enforcement mechanics. For practical primers, industry sites like Investopedia and legal analyses in the National Law Review are helpful starting points (Investopedia; National Law Review).
Further reading and internal links
- Steps to Qualify for Lien Withdrawal or Subordination: https://finhelp.io/glossary/steps-to-qualify-for-lien-withdrawal-or-subordination/
- Subordination Agreement: https://finhelp.io/glossary/subordination-agreement/
- What is Mezzanine Financing?: https://finhelp.io/glossary/what-is-mezzanine-financing/
Conclusion
Intercreditor agreements are foundational to multi‑lender deals because they set expectations for priority, remedies, and cooperation long before stress events occur. Well‑crafted ICAs reduce litigation risk, speed workouts, and improve recoveries for all parties. If you’re arranging or participating in multi‑lender financing, prioritize time and expert counsel on the ICA—it’s often the difference between an orderly restructuring and a destructive scramble.
Professional disclaimer
This article is educational and does not constitute legal or investment advice. Consult qualified attorneys and financial advisors who can tailor intercreditor agreements to your transaction, governing law, and jurisdictional nuances.
Resources and citations
- U.S. Securities and Exchange Commission — materials on secured financing and creditor rights: https://www.sec.gov
- Investopedia — intercreditor agreement overview: https://www.investopedia.com/terms/i/intercreditor-agreement.asp
- National Law Review — practical articles on intercreditor agreements: https://www.natlawreview.com
