An intercreditor agreement is a legal document that outlines the terms and conditions of a relationship between two or more creditors who lend money to the same borrower. The agreement is necessary when different types of lenders, such as senior lenders and junior lenders, work together to finance a single project or business.
The purpose of an intercreditor agreement is to establish a clear set of guidelines for each lender`s rights and obligations in the event of a default or bankruptcy by the borrower. The agreement often outlines which lender has priority over collateral, how proceeds will be distributed, and how each lender will participate in decision-making processes.
One of the most critical provisions in an intercreditor agreement is the “waterfall” provision. This provision outlines the order in which each lender will receive payments from the borrower in the event of a default. Typically, senior lenders are paid first, followed by junior lenders.
The agreement also determines which lender has control over the borrower`s assets and operations. In some cases, a senior lender may hold first lien priority and have the right to make decisions about the borrower`s business. If the borrower defaults, the senior lender will have the right to take control of the borrower`s assets and sell them to repay the loan.
Another critical provision in the intercreditor agreement is the standstill provision. This provision prevents junior lenders from taking action against the borrower without the senior lender`s consent. The goal is to protect the borrower from being harassed by multiple creditors fighting for their share of the collateral.
In summary, an intercreditor agreement is a crucial legal document for lenders working in collaboration to fund a single project or business. The agreement ensures that each lender knows their rights and responsibilities and establishes clear guidelines for decision-making in the event of a default. The agreement also protects the borrower from being caught in the crossfire between different lenders.