As businesses grow and expand, they often require financing from multiple sources such as banks, private equity firms, and other investors. When multiple creditors are involved in financing a project or venture, it becomes necessary to have an intercreditor agreement in place to define their respective rights, responsibilities, and priorities.
An intercreditor agreement is a contract between two or more creditors that sets out the terms of their relationship with each other, the debtor, and the collateral. This agreement outlines the hierarchy of payment in the event of default, the allocation of proceeds from the collateral, and the roles and responsibilities of each creditor.
The primary purpose of an intercreditor agreement is to establish a framework that governs the relationship between creditors and ensures that they are aware of the risks and benefits of financing. This agreement is often used in situations where different creditors have different levels of seniority or priority in the repayment order.
For instance, a bank that has provided a company with a loan secured by a first mortgage will have priority over other creditors, such as a private equity firm that has invested in the company`s equity. In such a scenario, an intercreditor agreement will define the rights and obligations of each creditor, and in the event of default or bankruptcy, the order of repayment.
In addition, an intercreditor agreement will also define the terms of collateral, lien rights, and subordination. For example, if a senior creditor has a subordinated loan, they will agree to a lower level of collateral or lien rights than the senior creditor, who has been granted a first position lien.
Overall, an intercreditor agreement is a crucial document that helps to define the roles and responsibilities of creditors in a financing arrangement. It is an important tool that helps creditors manage the risks associated with financing and enables them to work together towards a common goal. By clearly outlining the hierarchy of payment and the allocation of proceeds, an intercreditor agreement enhances the confidence of lenders, investors, and other stakeholders in the financing arrangement and ultimately supports the success of the project or venture.