Intercreditor Agreement

Updated on April 25, 2024
Article bySourav Sinha
Reviewed byDheeraj Vaidya, CFA, FRM

What Is An Intercreditor Agreement?

An Intercreditor Agreement is a contract between common lenders regarding the terms and the collateral allocation if the borrower defaults. Such understanding is extremely beneficial to subordinate lenders as it protects their rights. It states how their individual interests are protected against a common borrower.

Intercreditor Agreement Meaning

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The creditors maybe two or more who clarify their rights through the contract in case of default. In its absence, there would be unnecessary confusion and inconsistency. Thus, to avoid any legal and unethical consequences, this agreement is drafted, highlighting the priorities and procedures to handle the default.

Key Takeaways

  • An Intercreditor Agreement is an agreement between typical lenders. It includes the terms and collateral allotment when the borrower defaults. 
  • It benefits subordinate lenders as it safeguards their rights. It also states how their interests are guarded against a typical borrower. 
  • It does business with inconsistency. Therefore, confusion happens when the borrower cannot make the payment.
  • This Agreement provides help in conducting business with an appropriate collateral distribution in default. Moreover, it averts unwanted collateral distribution harassment.

Intercreditor Agreement Explained

An inter-creditor agreement is drafted between two or more creditors regarding the procedure, rules, and priorities to handle a defaulted borrower. This document is essential for the lenders because it helps avoid unnecessary legal disputes and confusion.

The intercreditor agreement key terms are highly beneficial for subordinate lenders in case of default by the borrower as the words are already drafted beforehand. Hence, it removes the confusion that may arise in case of default. In addition, a well-drafted agreement will help properly distribute collateral. Therefore, it is always advisable to form a model intercreditor agreement.

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Example

Let us understand the standstill provision intercreditor agreement with an example.

Intercreditor-Agreement

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XYZ Co. is planning to raise $100 million, the bank has agreed to pay $20 million, so $80 million will have to be raised from outside. Two external creditors have agreed to pay $50 million and $30 million, respectively. Who will have the first claim on the borrower’s property if the borrower defaults, and how much can each lender recover?

All this confusion is sorted by drafting an intercreditor agreement template and getting it signed between the two lenders. The deal contains the standstill provision intercreditor agreement. That is because it will help the creditors distribute the collateral from the borrower in case of default. So, the agreement prevents lenders from engaging in uncalled disagreements over collateral distribution. All this confusion is sorted by an agreement signed between the two lenders. The deal is called the intercreditor agreement. That is because it will help the creditors distribute the collateral from the borrower in case of default. So, the intercreditor agreement’s key terms prevent lenders from engaging in uncalled disagreements over collateral distribution.

Issues

  1. It is challenging to set an order regarding the claim on individual assets in case of default. So, if the property is limited to cover the entire liability, which creditor will be placed first in the claim is tough to decide.
  2. Assets are of different values and liquidity, so it is not easy to determine which one will use the asset to cater to their needs. Therefore, the agreement is tough to draft, considering all the issues.

Need

This agreement deals with discrepancies and confusion that may arise in case of default in payment by the borrower. For example, if multiple parties give a loan to a borrower, the collateral is challenging to distribute as the assets are not of the same liquidity and value.

So, it is essential to draft a model intercreditor agreement regarding the proper allocation of assetsAllocation Of AssetsAsset Allocation is the process of investing your money in various asset classes such as debt, equity, mutual funds, and real estate, depending on your return expectations and risk tolerance. This makes it easier to achieve your long-term financial goals.read more and rights. Therefore, this agreement helps deal with the appropriate collateral distribution in default. In addition, it prevents unnecessary harassment of collateral distribution.

Advantages

  • An intercreditor agreement template should be converted into a legal document because it helps avoid confusion after the default of payment by the borrower, as the payoff after bankruptcy is already decided. Hence, it helps eradicate confusion and helps in the smooth running of settlement.
  • Junior creditor gains confidence and agrees to give borrowers loans as they know superior lenders will not ignore their rights.

Disadvantages

  • If the junior creditor fails to draft favorable terms, they must abide by the unfavorable terms throughout the agreement.
  • As superior lenders are considered more powerful than subordinate lenders, they might bend justice in a dispute.

Intercreditor Agreement Vs. Subordination Agreement

An Intercreditor Agreement is a collateral distribution once a borrower defaults in case the lenders are both superior. In the case of the subordination agreement, the loans are ranked in order of priority. It means a rank is given regarding which debt is to be paid first compared to other debts. So this ranking clears doubts in the minds of the lenders as they know who will pay all as per ranking.

Frequently Asked Questions (FAQs)

What does an intercreditor agreement do?

An Intercreditor Agreement is a signed document between two or more creditors describing how the competing interests are resolved and how to work in a group to serve the mutual borrower.

Is an intercreditor agreement a security document?

An Intercreditor Agreement is a legal contract between two or more creditors mentioning the borrower’s rights, obligations, and assets.

What is an intercreditor agreement UK?

The Intercreditor Agreement UK is the legally dated consent created among trustees, the liquidity provider, each liquidity facility that provides liquidity besides the Agreement, and the subordination agent. Moreover, one may be altered, supplemented, or modified from time to time according to the contract terms.

What is intercreditor Agreement vs Agreement Among Lenders?

An Intercreditor Agreement is a legal inter-creditor contract. It is duly signed between two or more creditors. This contract describes how it may resolve competing interests and how one must work to do something for the mutual borrower. In comparison, Agreement Among Lenders(AAL) splits the lenders into two or more lenders classes and allocates the economics per a waterfall or waterfalls. Moreover, it also provides certain rights.

Recommended Articles

This article is a guide to what is Intercreditor Agreement. We explain its difference with subordination agreement, its issues, examples, needs & advantages. Also, you may learn more about financing from the following articles: –