Capital & Financing

Intercreditor Agreements and Subordination

Learn what actually decides who gets paid first when a borrower fails: not the loan documents, but the contract the lenders sign with each other.

  • Expert
  • 13 min total
  • 13 chapters

What decision this helps you make: Whether the priority you think you bought is the priority you will have on the day it matters, and which specific clauses in the intercreditor agreement decide that.

What this topic is

An intercreditor agreement is a contract between two or more groups of a borrower's creditors that reorders the priority they would otherwise have. It can subordinate one group's liens to another's, subordinate one group's right to be paid at all, restrict who may enforce and when, force one group to hand over money it receives, and pre-commit each group's behaviour inside a future bankruptcy.

Why it matters

Two lenders can hold identical first-priority liens on identical collateral and end up with completely different outcomes because of a fifty-page document neither the borrower nor most of the deal team read closely. The intercreditor agreement is where second-lien lenders discover they cannot object to a sale of their own collateral, where mezzanine lenders discover their standstill runs longer than the senior lender needs to finish enforcing, and where a junior lender discovers it must turn over money it lawfully received.

Who should learn it

Anyone lending into or investing in a multi-tranche capital structure, borrowers negotiating a second layer of debt on top of an existing facility, and advisers who have to explain to a client why a second lien is not half a first lien.

What you will understand

  • The difference between lien subordination and payment subordination, and why one is far weaker than it sounds
  • How standstills, turnover, release, and purchase options actually operate in a workout
  • Which bankruptcy-court waivers courts have enforced, which they have not, and where the law remains unsettled
  • How to read an intercreditor agreement in the order that surfaces the real risks first

Prerequisites

Common misconception

"A second lien is the same claim as a first lien, just behind it." It is not. The lien is genuinely second in the collateral waterfall, and that part is simple. What is not simple is that a well-drafted intercreditor agreement also strips the second lien of most of the rights that make a secured claim worth holding: the right to enforce, the right to object to a sale of the collateral, the right to contest the first lien's adequate protection, and in some drafts the right to be treated as a secured creditor at all in the case. A second lien with a broad intercreditor can be closer to unsecured debt with a nice-sounding name.