Intercreditor Agreements Definition: Everything You Need to Know
An intercreditor agreement is a document used in financial transactions such as loans or bond issuances. It outlines the relationship between two or more creditors who have a stake in the same asset. This agreement sets out the rules and procedures for sharing the collateral of a borrower. This document is critical in situations where one creditor has a senior loan, while the other creditor has a subordinated loan.
The intercreditor agreement protects the interests of all creditors involved in a loan or bond issue. It is essential to ensure that the terms of the agreement are fair and equitable to all parties. The document specifies the priority of payment in the event of default, and it establishes the order in which creditors are repaid.
The agreement sets out the rights and obligations of each creditor. The senior creditor usually has priority over the junior creditor when it comes to the repayment of the funds. The junior creditor may be required to seek the approval of the senior creditor before taking any action relating to the loan or collateral.
The intercreditor agreement also covers other issues such as the right to vote on matters such as foreclosure, the right to participate in any restructuring or workout of the loan, and the right to receive notices and information regarding the borrower. The agreement may also contain provisions relating to the replacement of collateral, the enforcement of rights, and the allocation of costs.
Intercreditor agreements are commonly used in leveraged buyouts, where a company is acquired using a significant amount of debt. These agreements are also used in commercial real estate transactions, where a property may have multiple lenders.
In summary, an intercreditor agreement is a critical document that protects the interests of all creditors involved in a loan or bond issue. It establishes the rules and procedures for sharing collateral and specifies the priority of payment in the event of default. If you are considering entering into a loan or bond transaction, it is essential to understand the terms of the intercreditor agreement thoroughly. It is also crucial to seek professional legal advice to ensure that your interests are fully protected.