Intercreditor agreement

The intercreditor agreement is the agreement that organises relations between the different lenders of the same company where several layers of debt coexist. It defines their respective rank, the order in which they will be repaid and the rights of each in the event of difficulty, in particular the priority of Senior debt over Subordinated debt and Mezzanine debt.

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This document sets the rules of the game: the conditions under which a junior creditor may be paid while the senior is not fully repaid, the framing of remedies, Contractual subordination mechanisms and how recovered sums are shared under the Waterfall (distribution). It also covers standstill periods during which a subordinated creditor refrains from acting to give the senior time to manage a deteriorated situation.

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Take a structure combining 12 MCHF of senior debt and 4 MCHF of mezzanine. The agreement provides that the mezzanine is repaid only after full extinction of the senior, and imposes on the junior creditor a 120-day standstill on remedies in the event of default, so the senior can manage the situation.

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The intercreditor agreement is indispensable as soon as a structure combines several debt instruments, as in an Leveraged Buy-Out (LBO). Its negotiation is a technical strand of financial structuring: a clearly established rank and well-articulated rights condition the ability to raise diversified debt and to control its cost.