What Is an Intercreditor Agreement?
When a company borrows from multiple creditor classes, such as first-lien term lenders and second-lien noteholders, each group signs its own credit documents with the borrower. The intercreditor agreement is the separate contract among the creditors themselves, defining how their competing claims on the same collateral and cash flows rank against each other.
The agreement matters most in distress. During good times it sits in a drawer, but once a borrower defaults, the intercreditor governs who can seize collateral, who gets paid first from the proceeds, and how long junior creditors must wait before taking any enforcement action of their own.
Key Provisions and How They Work
Lien subordination provisions establish that first-lien lenders are paid in full from collateral proceeds before second-lien lenders receive anything, even though both hold security interests in the same assets. Standstill provisions then bar junior lenders from exercising remedies for a set period, commonly 90 to 180 days, giving senior lenders control over the timing and manner of enforcement.
Other common terms include payment blockage rights that let senior lenders halt payments to junior debt after a default, waivers of the junior lenders' rights to object to a senior-approved bankruptcy sale under Section 363, and provisions governing debtor-in-possession financing. Agreements between loan and bond tranches, or among unitranche lenders through an agreement among lenders, follow the same core architecture.
Why It Matters
Recoveries in leveraged credit are driven as much by documentation as by enterprise value. Two lenders with claims on the same borrower can experience wildly different outcomes depending on the intercreditor terms, which is why distressed investors read these agreements line by line before buying debt at a discount.
The agreement has also become a battleground in liability management transactions, where borrowers and majority lender groups have used gaps in intercreditor and credit agreement language to prime existing lenders through drop-down or uptier maneuvers. For anyone heading into restructuring, private credit, or leveraged finance, fluency with intercreditor mechanics is a genuine differentiator.
