What are intercreditor agreements?

An intercreditor agreement (ICA) is a contractual document separate to the underlying financing agreement that regulates the respective rights and ranking of the signatory creditors throughout the term of a financing, especially upon default.  Where two or more lenders have a lien on the same collateral of various categories, their relative priority will be different with respect to each category.  Its focus is on the security for the payment, not on payment.

If, for example, a revolving credit working capital lender has the first priority security interest in liquid assets, a term lender has the first priority in machinery and equipment, and a mortgage lender has a first priority in real estate, an intercreditor agreement could assign to each lender a junior interest in the others’ collateral.  For this, the ICA would need to:

• Establish the relative priorities;
• Delineate the rights that each lender has to foreclose upon or exercise other remedies with respect to each category of collateral; and
• Provide for restrictions on payments of junior indebtedness, if appropriate.

In addition to regulating the application of amounts paid by the borrower group between creditors, the intercreditor agreement addresses how and when the different creditor groups are entitled to take enforcement action against the borrower.  Other rights and restrictions that apply between the different classes of creditors include shareholder cure rights, mezzanine lender purchase rights and restrictions on amendments to finance documents by senior lenders.

As a contractual arrangement separate to the underlying financing agreement, the ICA contractually subordinates amounts owing to mezzanine lenders and other signatory creditors to all amounts owing to senior lenders.  Contractual subordination is supplemented by structural subordination.