Meaning
Contractual arrangement between lenders governing their respective rights to a shared borrower. An intercreditor agreement establishes which creditor gets paid first in the event of a financial liquidation. This document prevents legal battles between senior and junior lenders during a corporate restructuring.
Priority Ranking
Senior lenders receive payment before any funds are distributed to subordinate parties. The intercreditor agreement clearly defines these tiers to protect the interests of those with the highest security. Clear rankings reduce the risk for banks when lending to large corporations.
Default Management
Procedures for handling a missed payment are agreed upon by all participants. When a default occurs, the intercreditor agreement dictates whether the senior lender can take immediate action or if they must wait for a specific period. Junior creditors often have a right to buy out the senior debt to gain control of the process.
Coordination between lenders prevents a chaotic seizure of assets. This structure ensures that the business can be stabilized or sold for the maximum value.
Payment Waterfall
Cash flow from the operations of the borrower is distributed according to a strict mathematical sequence. Following the intercreditor agreement ensures that interest and principal payments reach the correct party at the correct time. Compliance with this sequence is verified by an independent trustee.