Why intercreditor terms matter
Intercreditor terms determine who gets paid first, how collateral is shared, and which lender can take enforcement action. Poorly drafted terms create competing claims, slow collections, and raise legal costs—any of which can reduce recoveries and derail restructuring efforts. In my practice advising borrowers and lender groups, the strongest deals balance enforceable senior protections with realistic protections for junior participants.
Key clauses to negotiate (and why they matter)
- Payment priority and waterfall: Specify senior versus subordinated ranking, interest and principal priorities, and how recoveries are distributed. This clause is the foundation for lender rights.
- Collateral allocation and sharing: Define which assets secure which loans, and whether collateral can be shared pari passu or carved out for specific lenders.
- Standstill and enforcement timing: A standstill delays enforcement by subordinated or non-consenting lenders so a lead lender can pursue remedies without competing actions—critical in insolvency scenarios.
- Voting and amendment mechanics: Set quorum, consent thresholds, and whether amendments affecting senior rights require unanimous or majority consent.
- Remedies and step-in rights: Clarify when a senior lender can take control of collateral, foreclose, or appoint a receiver. Also limit junior lender actions while senior workout options are pursued.
- Intercreditor security structures: Include subordination agreements, intercreditor security trusts, and intercompany guarantees if relevant.
Practical negotiation steps — a playbook
- Prepare: Map all existing liens, security interests, guarantors, and priority conflicts. Obtain UCC searches and title work early.
- Prioritize objectives: Decide what matters most (e.g., preservation of cash flow for borrower, senior enforcement certainty, or junior recoveries) and rank negotiating points accordingly.
- Use a lead or agent lender: Appoint a lead lender or administrative agent to represent senior interests and streamline communications; document the agent’s powers clearly.
- Carve clear enforcement timelines: Short, objective trigger events (payment default, insolvency filings) reduce ambiguity and litigation risk.
- Build protective covenants: Include limited negative covenants for borrowers that protect collateral value without strangling operations.
- Consider escrow or intercreditor trust mechanisms: These can hold collateral proceeds and distribute them by waterfall, avoiding disputes over allocations.
- Draft amendment and waiver rules: Make it clear which lenders must consent to changes that affect senior ranking or collateral structure.
- Test exit scenarios: Negotiate what happens on refinancing, asset sales, or bankruptcy to avoid surprises at critical junctures.
Negotiation tactics that work
- Start from a clear economic structure: Lenders respond better when priorities and expected recoveries are explicit.
- Trade concessions: Junior lenders will accept restrictions if they secure limited voting rights, defined payout schedules, or payment-in-kind options.
- Use deadlines and milestones: Time-box negotiations to avoid protracted uncertainty that can harm borrowers and lenders alike.
- Involve counsel early: Good drafting anticipates enforcement paths and avoids ambiguous language that breeds litigation.
Common mistakes and red flags
- Vague enforcement triggers: Ambiguity over when remedies may be exercised invites disputes.
- Ignoring intercompany or affiliate liens: Unrecorded or subordinate liens can upend priority expectations.
- Overlooking bankruptcy implications: Ensure terms are workable in insolvency—standstills and waivers should be narrowly tailored and consistent with restructuring law.
- Failing to align amendment rules: If amendment thresholds are unclear, a single holdout can block sensible restructurings.
Examples (brief)
- Senior/subordinated loan: Senior lender keeps first lien on operating assets; subordinated lender accepts a payment waterfall and a defined standstill during senior enforcement. This protects the senior’s recovery while preserving a path for junior upside.
- Syndicated loan with participant lenders: An administrative agent holds collateral in trust and enforces remedies per the intercreditor waterfall, preventing individual participants from racing to seize assets.
Tips from practice
- Be transparent: Share lien searches and loan documents early to build trust among lenders.
- Keep a negotiation checklist: Prioritize clauses that affect cash flow and enforcement first.
- Prepare fallback positions: Have an acceptable default structure if full agreement isn’t possible.
- Engage restructuring counsel for complex deals: Bankruptcy-proof drafting is specialized and prevents costly post-default disputes.
Relevant internal resources
- Read about who gets paid first in intercreditor disputes: Intercreditor Agreements: Who Gets Paid First.
- What borrowers should know before signing: Intercreditor Agreements: What Borrowers Should Know.
- For context on syndicated lending: Understanding Loan Syndication: How Multiple Lenders Finance One Loan.
Authoritative sources and further reading
- Consumer Financial Protection Bureau (general borrower protections): https://www.consumerfinance.gov
- Overview of intercreditor concepts: Investopedia — intercreditor agreement articles (investopedia.com)
Professional disclaimer
This article is educational and does not constitute legal, tax, or financial advice. Complex intercreditor negotiations often require counsel and restructuring specialists; consult qualified attorneys and financial advisors for decisions specific to your transaction.
Last reviewed: 2025 — content reflects common market practices and negotiation priorities current as of 2025.
