An intercreditor agreement is a contract between secured lenders to the same borrower. It sets which lender has first claim on which collateral, which lender controls enforcement if the borrower defaults, how long the other must wait, how proceeds are split, and what changes either lender may make to its loan. The two common versions rank a first lien lender ahead of a second lien lender on all collateral, or split the collateral, with an asset-based lender first on receivables and inventory and a term lender first on everything else. The borrower often signs only an acknowledgment, but the terms bind it for the life of both loans.
- Parties
- The lenders; the borrower usually acknowledges
- Settles
- Lien priority, enforcement control, standstill, proceeds waterfall, amendments
- Model 1
- First lien and second lien on the same collateral
- Model 2
- Split lien: ABL first on working capital assets, term lender first on the rest
- Why owners care
- It limits refinancing, amendments and new debt for the life of the loans
Why two lenders need a contract with each other
Article 9 of the Uniform Commercial Code already ranks liens, generally in the order they were filed. So why a separate agreement? Because filing order answers only one question, who is paid first from collateral, and leaves the harder ones open. Can the second lender foreclose while the first is negotiating with the borrower? Can the first lender increase its loan and push the second further back? If the business files for bankruptcy, can the second lender object to new financing? An intercreditor agreement answers those questions in advance, between lenders who both want the deal to close.
It differs from a subordination agreement mainly in who is involved and what is ranked. A subordination agreement usually puts a seller, an owner or a mezzanine lender behind the senior lender in payment. An intercreditor agreement usually governs two institutional secured lenders and focuses on liens, collateral and enforcement. In a typical first lien and second lien structure, both lenders may be paid interest in full every month; only their claims on collateral are ranked.
The two common structures
First lien and second lien. Both lenders hold liens on the same collateral, and the second lien lender agrees its lien ranks behind. The first lien lender controls enforcement. The second lien lender is paid from collateral only after the first lien is paid in full.
Split lien, or ABL and term loan. An asset-based lender and a term lender each take first priority on different collateral, and second priority on the other's. The asset-based lender cares about the assets that turn into cash; the term lender about the long-lived assets and the business as a whole. See how an ABL and term loan split the collateral.
| Collateral | First lien / second lien | Split lien: ABL lender | Split lien: term lender |
|---|---|---|---|
| Receivables | First lien lender first | First priority | Second priority |
| Inventory | First lien lender first | First priority | Second priority |
| Deposit accounts and cash | First lien lender first | First priority | Second priority |
| Equipment | First lien lender first | Second priority | First priority |
| Real estate | First lien lender first | Second priority, if pledged | First priority |
| Intellectual property and other intangibles | First lien lender first | Second priority | First priority |
| Shares in subsidiaries | First lien lender first | Second priority | First priority |
A third arrangement, the agreement among lenders in a unitranche, splits one loan into a first-out and a last-out piece. The borrower often never sees that document at all; see first-out and last-out unitranche. Where lenders rank equally rather than one behind the other, the structure is pari passu.
The terms that do the work
- Lien priority. Which lender is first on which collateral, regardless of who filed first or whether a lien was properly perfected.
- Payment waterfall. How proceeds of collateral are applied after an enforcement or sale: to the senior lender's claim in full, then to the junior lender, then to the borrower.
- Enforcement standstill. How long the junior lender must wait after a default before it can foreclose or take collateral, while the senior lender decides what to do.
- Senior debt cap. The most senior debt the junior lender agrees to rank behind, so the senior lender cannot lend more and dilute the junior lender's collateral.
- Amendment limits. Changes each lender may make to its own loan without the other's consent, such as raising the rate, shortening maturity or tightening covenants.
- Release of collateral. When the senior lender releases collateral, for instance in an asset sale, the junior lien is released too.
- Purchase option. The junior lender's right to buy out the senior loan at par after a default, taking control of the situation.
- Bankruptcy terms. The junior lender's agreement not to contest financing the senior lender provides or supports in a bankruptcy, and limits on its other objections.
- Access rights. In a split lien, the ABL lender's right to use the term lender's equipment and premises to finish and sell inventory after a default.
Why the borrower should care
Borrowers tend to treat the intercreditor agreement as the lenders' business. It is not. The borrower usually signs only an acknowledgment, but the agreement shapes what the business can do for years:
- Refinancing one lender. Replacing the senior or junior loan usually means the new lender has to sign on to the same agreement or negotiate a new one. A narrow refinancing clause can make replacing one lender far harder than it should be.
- Growing the senior loan. The senior debt cap limits how much more the senior lender can lend, including for an add-on acquisition or a larger line, without the junior lender's consent.
- Amendments in a tough year. If the business trips a covenant, it may need both lenders to agree to a fix. The intercreditor agreement decides who has a veto. See options after a covenant breach.
- Selling assets. Collateral release terms govern whether a division or a piece of real estate can be sold without a fight between lenders.
- A default. The standstill and purchase option decide who the business negotiates with and for how long. A junior lender with a short standstill can force the pace.
The borrower may not sign every term, but it lives under every term. Read the intercreditor agreement before the loan documents are final, not after the first covenant test.
What a borrower can influence
The lenders negotiate most of the agreement between themselves, but the borrower has leverage before closing and should use it on a few points:
| Point | What the borrower wants | Why |
|---|---|---|
| Refinancing clause | Either loan can be refinanced on similar terms without re-negotiating the agreement | Keeps the option to replace one lender later |
| Senior debt cap | Headroom above the closing amount | Room for a larger line or a small acquisition |
| Permitted amendments | Ordinary covenant resets allowed without the other lender | One lender's consent is easier to get than two |
| Asset sales | Releases that follow the senior lender's consent | A sale the senior lender has approved is not held up by a second veto |
| Consistent covenants | The junior lender's covenants set with cushion to the senior's | A junior default should not arrive before a senior one; see covenant headroom |
When Transparent structures a senior and junior loan, or an asset-based line beside a term loan, the lender package presents both loans, the collateral split and the proposed terms together, so each lender sees the whole structure it is agreeing to sit in. See how intercreditor terms play out in a capital structure and what goes in the package.
Common questions
- Does the borrower sign the intercreditor agreement?
- Usually only an acknowledgment. The lenders are the parties. The borrower agrees to be bound where the agreement affects it, such as payment restrictions and collateral releases.
- Is an intercreditor agreement needed with an equipment lender?
- Often not. An equipment lender with a purchase-money lien on specific equipment usually just needs the senior lender's consent. A full intercreditor agreement is typical when two lenders share or split the broader collateral.
- What is the difference between an intercreditor agreement and a subordination agreement?
- A subordination agreement usually ranks a junior creditor's debt behind the senior loan in payment, and is common for seller notes and owner loans. An intercreditor agreement usually governs two secured lenders' liens, enforcement and collateral.
- Can the junior lender foreclose if the business defaults?
- Only after the standstill period, and usually only if the senior lender has not started its own enforcement. The first lien or first priority lender typically controls enforcement on its collateral.
- What happens to the intercreditor agreement if one loan is refinanced?
- It depends on the refinancing clause. A well-drafted agreement lets a new lender step into the old lender's place on similar terms. A narrow one means renegotiating with the lender that stays.