Intercreditor Agreement Use: An Overview
Intercreditor agreements have become increasingly common in the world of finance, particularly in relation to complex loan agreements. These agreements outline the rights and obligations of different creditors who have a stake in the same borrower. They are put in place to ensure that all parties involved are aware of their respective positions in the borrowing structure, and to prevent disputes from arising in the event of default or bankruptcy.
What is an Intercreditor Agreement?
An intercreditor agreement is a contract that sets out the relationship between two or more creditors who have lent money to the same borrower. The agreement outlines the order of priority of each creditor`s claims on the borrower`s assets in the event of non-payment or default. It also sets out the conditions under which the junior creditors may receive payments, and the conditions under which they may take control of the borrower`s assets.
Why are Intercreditor Agreements Important?
Intercreditor agreements are important for several reasons. For one, they help to minimize the risk of conflict between different creditors with competing interests. Without an intercreditor agreement, junior creditors may be able to seize the borrower`s assets without the consent of senior creditors, leading to disputes and potential legal action. An intercreditor agreement helps to clarify the rights and priorities of all parties involved, ensuring that everyone knows where they stand.
Another important reason for intercreditor agreements is that they help to reduce the risk of default. By outlining the conditions under which junior creditors can receive payments and take control of assets, these agreements help to provide a measure of stability and certainty to the lending process. This reduces the risk of the borrower defaulting on their loans, which in turn reduces the risk of losses for lenders.
Who Needs an Intercreditor Agreement?
Intercreditor agreements are typically used in complex lending arrangements involving multiple creditors. They are common in situations where a borrower is seeking to raise capital from multiple sources, such as in leveraged buyouts or mergers and acquisitions. However, intercreditor agreements may also be used in other situations where there are multiple creditors with competing interests, such as in real estate development projects.
What Should an Intercreditor Agreement Include?
Intercreditor agreements can be complex, and should be tailored to the specific needs of each situation. However, there are several key provisions that should be included in most intercreditor agreements. These include:
– The order of priority of each creditor`s claims on the borrower`s assets
– The conditions under which junior creditors may receive payments
– The conditions under which junior creditors may take control of the borrower`s assets
– The procedure for enforcement of the agreement
– The mechanism for resolving disputes between creditors
Conclusion
Intercreditor agreements are an important tool in the world of finance, helping to ensure that different creditors with competing interests are able to work together effectively. By clarifying the rights and priorities of all parties involved, these agreements help to reduce the risk of conflict and default, providing stability and certainty to the lending process. If you are involved in a complex lending situation with multiple creditors, it is important to consider whether an intercreditor agreement may be appropriate for your needs.