What is a Loan Intercreditor Agreement and Why Does It Matter?

A Loan Intercreditor Agreement (often shortened to “intercreditor agreement”) is a contractual roadmap for lenders that covers who stands first in line if a borrower defaults, how collateral is handled, and how lenders coordinate during workouts or enforcement. In my practice advising borrowers and mezzanine lenders, a clear intercreditor agreement has been the single best tool to avoid litigation, speed up restructuring, and preserve value for all parties.

Below I break down what these agreements typically include, why each clause matters, common negotiation points, and practical steps borrowers and lenders should take before signing.

What does a typical intercreditor agreement cover?

Key provisions you will almost always see:

  • Priority of claims and payment waterfall: Defines which creditor is senior, which is junior, and the exact order of distributions on a liquidation or sale. This affects recoveries and pricing for each lender (see also: Priority and Subordination: Who Gets Paid First in Multi-Lender Deals).

  • Subordination language: States whether and how a creditor’s rights (payment, liens, or enforcement) are subordinated to others. For junior lenders, this acceptance of risk typically requires higher interest rates or compensating covenants.

  • Enforcement and standstill rights: Senior lenders often require a period during which junior creditors must not enforce remedies (a “standstill”) while the senior lender exercises enforcement or foreclosure rights.

  • Collateral sharing and release mechanics: How collateral is allocated, whether collateral can be released for asset sales, and the mechanics for replacement collateral or substitution.

  • Payment blocking, intercreditor triggers, and cure rights: Terms that allow the senior lender to block payments to juniors under specific events, or give juniors a limited right to cure certain defaults to protect their interests.

  • Voting and consent mechanics: How lenders vote on restructurings, amendments, or waivers—who controls decisions and which actions require unanimous consent.

  • Perfection and priority steps: Obligations for lien filing, UCC financing statements, and other perfection actions to ensure the senior lender’s priority (see more on security perfection in Security Interest Perfection: Why It Matters in Loan Contracts).

  • Fees, expenses, and indemnities: Allocation of enforcement costs, attorneys’ fees, and junior lender reimbursement in certain scenarios.

  • Confidentiality and information-sharing provisions: Rules for how lenders exchange borrower information during workouts to coordinate actions and preserve borrower value.

Who signs an intercreditor agreement and when?

Parties typically include the senior lender(s), junior lenders (mezzanine or subordinated debt holders), and sometimes the borrower (as a third-party beneficiary or an express signatory). Intercreditor agreements are negotiated at origination of the financings when multiple capital sources are present—but they can also be negotiated later when a new lender joins an existing capital stack.

If you are a borrower bringing in additional debt or equity, insist that lenders document their relative rights in writing before closing. Without a written intercreditor framework, mismatched expectations can lead to enforcement races and value destruction.

Why each clause matters (practical implications)

  • Priority and subordination: Determines recoveries and therefore pricing. A senior claim reduces risk for the senior lender but limits junior recoveries—so juniors price for that risk. Regulators and market participants view perfection and documented priority as essential for enforceability (see Federal Reserve and OCC commentary on secured lending practices).

  • Standstill and enforcement mechanics: Prevents a single junior creditor from undermining an orderly foreclosure or sale process. In my experience, a well-crafted standstill has preserved asset value and avoided costly court battles.

  • Collateral release and substitution: Allows the business to operate or to sell assets without renegotiating the full capital structure. Poorly defined release mechanics are a frequent source of disputes.

  • Voting and consent: A senior lender that controls restructuring votes can impose a workout plan—so juniors often negotiate limited veto rights for certain major decisions.

Typical negotiation points and trade-offs

  • Length of standstill: Seniors push for longer standstills; juniors push to shorten them or secure cure rights. Balance depends on asset liquidity and deal economics.

  • Payment blocking triggers: Seniors want broad triggers; juniors want narrow, objective triggers tied to material deterioration.

  • Collateral baskets and release pricing: Juniors seek defined baskets or thresholds for asset sales that trigger mandatory junior payment or replacement collateral.

  • Information rights: Juniors want access to borrower financials; seniors may try to limit distribution to avoid market exposure. Reasonable, narrowly tailored reporting schedules usually resolve this.

Real-world examples and cautionary tales

Example 1 (construction to completion): A developer coordinated a construction loan (senior bank) and a mezzanine financing (junior). The intercreditor agreement allowed the mezzanine lender to receive residual equity distributions only after the senior lien was paid in full—this contract protected the bank while permitting the mezzanine lender to participate in upside once the project sold.

Example 2 (dispute without an agreement): I consulted on a deal where a bank and a private lender both claimed rights to the same collateral after default. No intercreditor agreement existed, which led to a protracted court fight, expensive litigation, and lower recoveries for both lenders. Documenting relative rights early would have saved time and expense.

Common mistakes to avoid

  • Leaving enforcement and standstill details vague—this invites litigation.

  • Failing to perfect security interests in all required U.S. jurisdictions; a missed UCC filing can cost senior status.

  • Assuming verbal or informal understandings are enforceable among multiple creditors.

  • Overlooking tax or bankruptcy implications—subordination language should be reviewed by counsel experienced in insolvency law.

How borrowers and lenders should prepare

For borrowers:

  • Provide a clear cap table and schedule of existing liens.
  • Ask for proposed intercreditor language early and involve outside counsel to identify red flags.
  • Negotiate reasonable release mechanics so you can sell or refinance without undue delay.

For lenders:

  • Insist on perfection steps and proof of filing before closing.
  • Consider escrow or blocked accounts for payments where appropriate.
  • Use clear, objective triggers for standstill and payment-blocking rights.

Frequently asked questions

Q: Can an intercreditor agreement be modified after closing?
A: Yes, but modifications usually require consent from affected lenders. Important changes—like altering priority or releasing material collateral—will typically require senior lender approval.

Q: Does the borrower sign the intercreditor agreement?
A: Sometimes. Borrowers sometimes sign as a party or as a beneficiary; in other deals, only lenders sign and the borrower is a third-party beneficiary. The structure depends on leverage and negotiation leverage.

Q: What documents should I review alongside an intercreditor agreement?
A: Review the loan agreements, security agreements, UCC financing statements, mortgages/deeds of trust, and any mezzanine or equity documentation.

Related reading

Professional disclaimer

This article is educational and not legal or financial advice. Terms of intercreditor agreements are fact-specific; consult qualified legal counsel and your lender(s) before relying on any information here.

Sources and further reading

  • Investopedia, “Intercreditor Agreement” (overview and market context).
  • Federal Reserve and Office of the Comptroller of the Currency guidance on secured lending and collateral perfection.
  • Practical treatises on commercial lending and mezzanine finance for template clauses and negotiation strategies.

If you want, I can draft a checklist of clauses to watch for in your specific deal or review a redline of proposed intercreditor language—tell me which role you represent (borrower, senior lender, junior lender) and the transaction type.