When Is an Intercreditor Agreement Required?
An intercreditor agreement is a legal contract that outlines the rights and responsibilities of different lenders in a financing arrangement. Typically, intercreditor agreements are used in complex financing transactions where multiple lenders are involved. In this article, we’ll discuss when an intercreditor agreement is required, and what it should include.
When Is an Intercreditor Agreement Required?
An intercreditor agreement is required when multiple lenders are involved in a financing transaction. It is designed to establish a hierarchy of claims against the collateral used to secure the loan. In situations where there are different types of lenders, such as senior and junior lenders, an intercreditor agreement is necessary to determine how funds will be used to pay off debts.
Intercreditor agreements are commonly used in leveraged finance transactions, real estate financings, and asset-based financings. These agreements are often put in place to ensure that the interests of different lenders are protected, and that they have a clear understanding of their respective rights and obligations.
What Should an Intercreditor Agreement Include?
An intercreditor agreement should include several key provisions, including:
1. Collateral Priority: The intercreditor agreement should establish the priority of claims against the collateral. This will ensure that lenders are paid in the order that they are owed.
2. Payment Waterfall: The agreement should outline the order in which funds will be distributed to lenders. Typically, senior lenders are paid first, followed by junior lenders.
3. Voting Rights: The agreement should specify the voting rights of each lender. This will help prevent disputes over the management of the collateral.
4. Enforcement Actions: The agreement should detail the actions that can be taken to enforce the rights of lenders. This may include foreclosure or other legal actions.
5. Intercreditor Fees: The agreement should establish the fees that will be paid to each lender for their participation in the transaction.
Conclusion
An intercreditor agreement is an essential component of any financing arrangement involving multiple lenders. It is designed to protect the interests of all parties involved, and to ensure that funds are distributed in a fair and transparent manner. By including key provisions such as collateral priority, payment waterfall, voting rights, enforcement actions, and intercreditor fees, lenders can establish a clear understanding of their respective rights and obligations.