Intercreditor AgreementCredit Repair Definition
A contract between two or more creditors of the same debtor, defining their respective rights and lien priorities regarding collateral.
Definition
An intercreditor agreement is a contract entered into by two or more creditors who have extended loans to the same borrower, often secured by the same collateral. This agreement clarifies the relationship between the creditors and establishes their respective rights, responsibilities, and priorities concerning the collateral and loan repayment. Key provisions typically address lien subordination (which creditor gets paid first from collateral proceeds in case of default), rights to receive payments, standstill periods (preventing junior creditors from taking action for a time), rights upon bankruptcy, and procedures for enforcing remedies against the borrower or collateral. These agreements are crucial in complex financing structures involving senior and junior (mezzanine) debt to avoid conflicts between lenders.
Frequently Asked Questions
Why are intercreditor agreements necessary?
They provide clarity and certainty for lenders in situations where multiple creditors have claims against the same borrower or collateral. They prevent disputes between creditors, define the order of repayment, and facilitate complex financing arrangements by clearly outlining each lender's rights, especially in case of borrower default or bankruptcy.
What is lien subordination within an intercreditor agreement?
Lien subordination is a key component where one creditor (the junior or subordinated creditor) agrees that their lien or claim on the collateral will rank behind the lien of another creditor (the senior creditor). This means the senior creditor has the first right to be repaid from the proceeds of the collateral if the borrower defaults.
Who benefits most from an intercreditor agreement?
While both senior and junior lenders benefit from the clarity provided, the senior lender typically benefits most as the agreement formally establishes their priority position regarding collateral and repayment, reducing their risk.
Related Terms
Need Credit Help?
Discover tools and resources to help improve your credit score and financial health.