An intercreditor agreement is a legal document that outlines the relationship between two or more creditors who have lent money to the same borrower. The agreement sets out the terms and conditions governing each creditor`s rights and responsibilities in the event of a default by the borrower.
The intercreditor agreement typically includes clauses that determine the priority of each creditor`s claim to the borrower`s assets in the event of a default. For example, if the borrower defaults on their debt obligations, the first creditor to be repaid will be the senior creditor, who has the first claim on the borrower`s assets. The second creditor, known as the junior creditor, will only be repaid after the senior creditor`s claim has been satisfied.
Another important aspect of an intercreditor agreement is the subordination clause. This clause specifies that the junior creditor agrees to subordinate their claim on the borrower`s assets to the senior creditor`s claim. This means that if the borrower defaults, the senior creditor will be repaid first, and the junior creditor will only be repaid once the senior creditor has been fully repaid.
The intercreditor agreement also outlines the process for negotiating and approving any changes to the borrower`s debt obligations, such as a restructuring of their debt or a refinancing. The agreement may require the unanimous consent of all creditors before any changes can be made, or it may allow changes to be made with the approval of a certain percentage of creditors.
In addition, an intercreditor agreement may include provisions for dispute resolution, including the appointment of an arbitrator or mediator to resolve any disputes that may arise between the creditors.
Overall, an intercreditor agreement is an important legal document that ensures that multiple creditors who have lent money to the same borrower are able to coordinate their efforts in the event of a default and protect their respective interests. By setting out clear rules and procedures for how the creditors will work together, an intercreditor agreement can help to mitigate the risks associated with lending money to a borrower with multiple creditors.