An intercreditor agreement is, as the name suggests, an agreement among different creditors of a common borrower that specifies the relationship among the creditors, often addressing such issues as priority of payments, subordination of liens, and actions in a bankruptcy of the borrower. This column has tackled intercreditor and subordination issues on several occasions over the past dozen years.1 During that period, the institutional second lien debt market, and the corresponding importance of intercreditor agreements, have grown enormously. Today we discuss the model intercreditor agreement recently promulgated by an American Bar Association task force for use in negotiating intercreditor arrangements between a lender or lending syndicate making commercial loans secured by a first priority lien on specified collateral (first lien loans) and a lender or lending syndicate making commercial loans secured by a second priority lien on the same collateral (second lien loans).2
Background
When this column addressed key issues for secured creditors in subordinated debt arrangements in 1999, the structures that involved intercreditor agreements were much simpler than those employed in recent years. The subordinating creditor then usually was an insider of or investor in the borrower, rather than a financial institution seeking a return on a financing arrangement. Where the subordinating creditor was a financial institution, normally it was an investment company, rather than a bank or other commercial lender, that provided mezzanine financing. Mezzanine financing—a hybrid of debt and equity that sits midway between the two in a borrower’s capital structure—is debt capital that gives the lender the right to convert the debt into an ownership or equity interest in the borrower upon foreclosure or default of the loan, and mezzanine lenders often receive equity or warrants for equity in the borrower as a compensation “kicker.”
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