Intercreditor Agreement
An Intercreditor Agreement is a legal document that outlines the relationship and priorities between multiple creditors who have claims against the same borrower or collateral. This agreement is crucial in situations where a borrower has multiple layers of debt, as it clarifies how payments will be distributed among creditors in the event of default or bankruptcy.
The Intercreditor Agreement typically specifies:
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Priority of Claims: It establishes which creditor has priority over others in terms of repayment. For example, senior creditors are often paid first, while subordinated or junior creditors are only paid after senior debts are settled.
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Rights and Obligations: It details the rights of each creditor, including their ability to take action in the event of default. This may include rights to enforce security interests or initiate legal proceedings.
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Communication and Cooperation: The agreement may set forth requirements for creditors to communicate with one another and cooperate in managing the borrower’s financial situation.
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Dispute Resolution: It outlines procedures for resolving disagreements among creditors, which can be essential in maintaining order during a distressed financial situation.
For instance, in a leveraged buyout where a company takes on both senior and mezzanine debt, the Intercreditor Agreement would delineate the repayment order and rights concerning the collateral backing the loans. This ensures that all parties understand their positions and helps to mitigate conflicts that may arise if the borrower encounters financial difficulties.
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