Get in Line: Intercreditor Agreements

Inter-creditor Agreements

Business financing can be quite complex. An entity may use more than one lender to finance different aspects of its business, and indeed a particular constellation of lenders is frequently chosen to serve some strategic or operational objective. Such a network of financing arrangements presents
difficulty to secured lenders who value certainty with respect to both secured assets and priority.

Intercreditor agreements are the legal solution to ambiguity surrounding complicated business financing. These agreements outline how potentially
competing interests of two secured creditors will be dealt with in case of default. Typically intercreditor agreements tackle relative priority issues, specify the assets each party has security over, and clarify payment processes (that is, which lender can accept payment from the borrower and when they can do so) as well as enforcement procedures.

Negotiation of intercreditor agreements is often leverage based. This is particularly true in the determination of respective priority, such as the subordination of payments made by the borrower in satisfaction of each lender’s loan covenants. For both senior and junior lenders, then, careful drafting is crucial to ensure clarity regarding debt collection.

Intercreditor agreements also determine priority in relation to the security taken for debt, an especially important detail in cases of default. Frequently different lenders will have security only over specific assets, and each will want to confirm that these are clearly outlined in the intercreditor agreement.

Although intricate, intercreditor agreements are extremely useful in protecting the rights of secured lenders. At Keyser Mason Ball, LLP we take a very practical approach to drafting these documents so as to establish both the security required by lenders and the sound foundations for business owners so that both may continue to grow.

If you have any questions relating to any of the above, please do not hesitate to contact David Di Gregorio at ddigregorio@kmblaw.com or 905.276.0429.