Intercreditor Agreement

Purpose of Intercreditor Agreements

When a borrower has multiple creditors, potential conflicts arise over repayment priority, collateral access, and the right to take enforcement action. An intercreditor agreement resolves these issues in advance by establishing clear rules governing the relationship between the creditors.

The agreement typically addresses which creditor has first claim on the borrower's assets (payment waterfall), whether subordinated creditors must wait for senior debt to be repaid before receiving payments (standstill provisions), who controls enforcement decisions if the borrower defaults, and how the creditors will share information about the borrower's financial condition.

Intercreditor Agreements in Debt Portfolio Transactions

In the context of portfolio acquisitions, intercreditor agreements become relevant when a buyer finances its portfolio purchases with debt from multiple lenders. The senior lender providing the primary credit facility and any mezzanine or subordinated lenders will enter into an intercreditor agreement that governs their respective rights to the portfolio assets and recovery proceeds.

These agreements also arise when the acquired portfolio itself contains accounts where the debtor has multiple creditors. Understanding the intercreditor dynamics is part of the buyer's due diligence process, as it affects recovery expectations and the legal strategy for individual accounts.

Key Provisions

Critical provisions in an intercreditor agreement include the payment waterfall (the order in which creditors receive payments), standstill periods (restricting junior creditors from taking enforcement action for a defined period), turnover provisions (requiring junior creditors to remit payments received during a default to the senior creditor), and buy-out rights (allowing one creditor to purchase the other's position). These terms are heavily negotiated and have significant implications for recovery outcomes in both performing and distressed scenarios.