What is an Intercreditor Agreement?
An Intercreditor Agreement (ICA) is a legal agreement that outlines the terms and conditions of how two or more creditors will work together to manage their respective interests in a borrower`s assets. It is commonly used in complex financing transactions where multiple lenders are involved, such as leveraged buyouts, project financings, and debt restructurings.
The ICA defines the hierarchy of claims and priorities between different lenders. This document outlines the rights and obligations of each lender, including the order of payments in the event of a borrower`s default. It also specifies how lenders will collaborate if there is a need for additional funding or if the existing loan terms need to be renegotiated.
The ICA serves as a protection mechanism for lenders. For example, if a borrower defaults on their loan, the ICA can dictate how the proceeds from the borrower`s assets will be distributed amongst the creditors. This agreement ensures that each creditor receives a fair share of the borrower`s assets.
Key Elements of an Intercreditor Agreement
An Intercreditor Agreement typically includes the following key elements:
1. Payment Priority: This outlines the order in which different lenders will receive payments in case of a borrower`s default. Generally, senior creditors are paid first, while junior creditors receive payments later.
2. Voting Rights: The agreement specifies how lenders will vote on critical issues related to the borrower, such as amendments to the loan agreement or additional funding needs.
3. Subordination: This clause outlines the subordination of junior lenders` claims to senior lenders` claims. This means that in the event of a borrower`s default, senior creditors will have priority over junior creditors.
4. Enforcement: The agreement defines how lenders will work together to enforce their respective rights in the borrower`s assets. This includes the appointment of a common agent or trustee to act on behalf of all lenders.
Conclusion
An Intercreditor Agreement is a critical document that protects the interests of lenders in complex financing transactions. It lays out the terms and conditions of how lenders will work together, including payment priorities, voting rights, subordination clauses, and enforcement mechanisms. This agreement ensures that all creditors receive a fair share of a borrower`s assets and provides a safeguard against any potential default.