Background

Intercreditor agreements grew common as financing got layered: banks, institutional lenders, mezzanine providers, and bondholders often participate in the same capital structure. Rather than rely on informal practices, parties use a written agreement to allocate risk and avoid costly litigation during distress.

How intercreditor agreements work

At their core, these agreements rank creditors and set rules for actions such as enforcement, sale of collateral, standstill periods, and debt repayments. Typical features include:

  • Priority and subordination clauses that specify which lender has first claim on collateral and cash flows.
  • Standstill and consent rights that can delay enforcement by junior creditors to give a senior creditor time to act.
  • Payment waterfalls that describe the order and conditions under which proceeds are distributed.
  • Remedies and enforcement procedures, often tailored to bankruptcy or insolvency scenarios.

In practice, the senior lender usually keeps control of enforcement of primary collateral while junior or mezzanine lenders accept limited rights in exchange for higher yields. In my practice working on leveraged financings, a well-drafted intercreditor clause prevents duplicative enforcement and clarifies who bears the cost of enforcement actions.

Key clauses to watch

  • Priority of Payments: Defines senior vs. junior claims and how recoveries are split.
  • Collateral Sharing and Carve-Outs: Explains whether junior lenders get a portion of collateral proceeds or certain carve-outs (e.g., indemnities, fees).
  • Standstill Period: A delay during which a junior lender cannot enforce remedies after a senior lender declares default.
  • Permitted Actions and Consent Rights: Lists actions that require the other lenders’ consent (e.g., amendments, waivers, asset sales).
  • Bankruptcy and Insolvency Protections: Rules for enforcement during chapter 11 or chapter 7, including whether the senior lender can credit-bid in a sale.

Practical example

Consider a manufacturing company with a senior bank loan and a mezzanine loan. The intercreditor agreement will typically let the senior bank enforce against the primary collateral first. If recoveries exceed the senior claim, the mezzanine lender then receives remaining proceeds. Without the agreement, both lenders might rush to foreclose or pursue competing liens, eroding recovery value.

Who is affected

  • Senior lenders (e.g., banks, commercial lenders): expect priority and broader enforcement powers.
  • Subordinate or mezzanine lenders: accept higher risk in exchange for higher returns and defined limited remedies.
  • Borrowers: face contractual constraints on refinancing, asset sales, or amendment rights that can affect flexibility.

Related reading: see our guide on Subordination Agreements Explained: Priority Between Debts (https://finhelp.io/glossary/subordination-agreements-explained-priority-between-debts/) and Mezzanine Financing for Growth-Stage Companies (https://finhelp.io/glossary/mezzanine-financing-for-growth-stage-companies/).

Negotiation tips (professional)

  1. Define triggers precisely. Avoid vague default definitions that expand enforcement windows unexpectedly.
  2. Limit standstill lengths. A long standstill can lock junior lenders out of remedies indefinitely.
  3. Carve out specific recoveries. Explicit carve-outs for fees, indemnities, or tax claims protect lender economics.
  4. Coordinate documentation. Align intercreditor terms with loan agreements, security documents, and guarantees to prevent contradictory provisions.

Common mistakes

  • Leaving enforcement mechanics vague, which invites disputes.
  • Failing to address bankruptcy contingencies (e.g., cramdown risks or adequate protection).
  • Neglecting to update intercreditor terms when the capital structure changes (refinancing, debt-for-equity swaps).

Quick FAQ

Q: Can intercreditor agreements be modified later?
A: Yes, but modification typically requires consent from all affected creditors; terms usually specify amendment thresholds.

Q: Do intercreditor agreements affect loan rates?
A: Yes. Subordination and restricted enforcement raise risk for junior lenders, which is priced into higher interest rates or fees.

Authoritative sources and further reading

  • UCC Article 9 (secured transactions) — overview of secured parties’ rights (Cornell Legal Information Institute).
  • U.S. Small Business Administration — financing and loan structures (SBA.gov).
  • Consumer Financial Protection Bureau — general borrower protections (consumerfinance.gov).

Disclaimer

This is an educational overview—not legal or investment advice. For contract drafting, negotiation, or case-specific strategy, consult a qualified attorney and financial advisor.