Intercreditor Agreement — Business Finance Glossary

Purpose of an intercreditor agreement

Where a business has borrowed from more than one creditor class — for example, a senior bank and a mezzanine fund — those creditors need contractual rules governing how they interact in normal operation and, critically, in a default or enforcement scenario. The intercreditor agreement (ICA) is that contract. It is distinct from the individual facility agreements that govern the terms of each loan.

In leveraged transactions, the ICA is typically based on the Loan Market Association standard form, modified by negotiation between the lender groups. It binds the borrower, guarantors, and security providers as parties, giving the borrower certainty about what each creditor can and cannot do.

Payment waterfall

The payment waterfall in an ICA specifies the order in which any funds — whether from operations, enforcement proceeds, or insolvency distributions — must be applied. A typical waterfall runs: costs and expenses of the security trustee and agent; senior interest; senior principal; mezzanine interest; mezzanine principal; equity. Creditors lower in the waterfall receive nothing until all ranks above them are satisfied in full.

• Permitted payments define when junior creditors can receive interest outside a default scenario
• Payment blockage provisions freeze junior payments during a defined period after a senior event of default
• Cure rights may allow equity to inject funds to remedy a default before enforcement is triggered

Enforcement standstills and instructing creditor

The ICA defines which creditor class has the right to instruct the security trustee to enforce. Senior lenders typically control enforcement. Mezzanine lenders may be entitled to purchase the senior debt (a 'yank the bank' or purchase option) rather than trigger a standstill. If the senior lender declines to enforce within a standstill period — often 90 to 180 days — the junior creditor may become entitled to enforce independently.

Directors should understand that once enforcement is underway, the ICA dictates the process, and the borrower's room to influence outcomes is limited. Early engagement with all creditor groups before a default is invariably preferable.