If you are involved in financing transactions, you may come across the term “intercreditor agreement”. But what does it mean? And why is this agreement significant?
An intercreditor agreement is a legal document that spells out the rights and obligations of multiple lenders who have provided financing to the same borrower. Typically, this agreement is created when the borrower has obtained both senior debt and junior debt from different lenders.
The purpose of the intercreditor agreement is to establish a framework for how the lenders will work together and coordinate their efforts in order to protect their respective interests. This includes setting out rules for how payments should be divided, how collateral should be valued, and how disputes should be resolved.
One of the key features of an intercreditor agreement is the “waterfall” provision. This provision outlines the order in which the lenders will be paid in the event that the borrower defaults on its obligations. Typically, the senior lenders are first in line to receive payment, followed by the junior lenders. However, the specifics of the waterfall provision can vary greatly depending on the terms of the financing arrangement.
So why is an intercreditor agreement significant? For starters, it can help to prevent disputes between lenders by establishing clear rules and procedures upfront. This can save time and money in the long run, as disagreements can otherwise result in costly litigation.
In addition, an intercreditor agreement can help to protect the lenders` investments by ensuring that each lender is treated fairly and has a clear understanding of its rights. Without such an agreement, conflicting claims and priorities could arise, potentially leading to financial losses for the lenders.
Overall, if you are involved in financing transactions, it`s important to understand the significance of intercreditor agreements. By working with experienced legal counsel and ensuring that such agreements are in place, you can help to protect your interests and minimize the risk of disputes down the road.