An Intercreditor Agreement is a contract, typically a deed, that governs the rights and ranking of two or more funders (often both debt and equity) in a financing arrangement. Typically, the contract controls the rights to receive payments (such as principal, interest, and fees prior to the enforcement of security) from a common debtor and the rights to enforce security over that debtor’s assets.
The term is frequently used synonymously with the term deed of priority, as both types of documents attempt to establish a ranking among creditors. However, an intercreditor agreement is frequently a more complex contract than a deed of priority, which will normally merely rank secured debt providers and govern the allocation of enforcement proceeds. In this article, intercreditor agreements, we take a look at the process involved and the options available to you.
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What Is The Purpose Of An Intercreditor Agreement?
The primary objective of the intercreditor agreement is to control contractually the relationship between the various categories of creditors. Arrangements pertaining to the first issue concern “subordination,” whereas arrangements pertaining to the second issue concern “priority.”
If the borrower has many lenders for the same loan and security, lenders must establish their right to the loan and security. In the majority of instances, lenders accept an agreement that each is entitled to a specific claim on the borrower’s assets.
However, when there is an arrangement between senior and junior lenders, the lenders enter into an intercreditor agreement. This agreement facilitates the clarification of their distinct rights.
What Should An Intercreditor Agreement Include?
Typically, this type of agreement restricts the borrower’s ability to make payments to junior lenders if the borrower defaults on the terms established in the agreement with the senior lenders. These measures are referred to as “payment blockage.” This rule even restricts the payments that junior lenders are entitled to in the normal course of their working relationship with the borrower, such as interest and standard fees and expenses. This type of agreement also includes a provision for buyout rights. This privilege permits a lender to purchase the claims and liens of other lenders. Such an option is triggered by situations such as filing for bankruptcy.
Standstill could be another provision in the intercreditor agreement. Under this provision, the junior lender is prohibited from pursuing action against the debtor to collect on its obligation. Typically, there is a time limit on taking any action (demanding money, initiating legal proceedings, etc.). In addition, the standstill period extends until the senior lender initiates enforcement proceedings. Occasionally, the period extends until the complete payback of the senior obligation.
The agreement may also include repayment limits. A junior lender could agree not to seek repayment until the senior debt is returned in full, with the exception of agreed-upon interest and other payments.
In some instances, the borrower is also a signatory to the contract. The borrower acknowledges the terms of the agreement, such as not making any payments to the junior lender until the senior lender has been repaid in full.
What Are The Potential Problems With Intercreditor Agreements?
Prior to signing the agreement, the junior lender must additionally define “senior debt” and “junior debt.” Also, it is typical for a senior lender to change the terms of the arrangement without the junior lender’s consent. Consequently, the junior lender must also monitor this. Before approving the transaction, the junior lender must conduct a thorough evaluation in order to circumvent such problems. In addition, the junior lender must negotiate the contract fairly. If the efforts were unsuccessful, the junior lender may reject the arrangement and pursue alternative options.
The junior lender must attempt to include a condition allowing it to assume control of the project in the event of default. To maximise its potential, it will have two possibilities. First, refinance the borrower to assure the continuation of the project, and second, repay the senior lender in full. If the senior lender has extended a substantial loan, the second option may be unrealistic.
How we can help
We have a proven track record of helping clients deal with the process involved in creating intercreditor agreements. We will guide you diligently and ensure all checks are carried out swiftly and efficiently and we firmly believe that with the right solicitors by your side, the entire process will seem more manageable and far less daunting. You can read more about the range of corporate services we offer by clicking here: https://blackstonesolicitorsltd.co.uk/corporate-legal-services/
How to Contact Our Corporate Solicitors
It is important for you to be well informed about the issues and possible implications of creating an intercreditor agreement. However, expert legal support is crucial in terms of ensuring your partnership is set up correctly.
To speak to our Corporate solicitors today, simply call us on 0345 901 0445, or click here to make a free enquiry. We are well known across the country and can assist wherever you are based. We also have offices based in Cheshire and London.
Disclaimer: This article provides general information only and does not constitute legal advice on any individual circumstances.
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