An intercreditor agreement is a contract between two or more lenders to the same borrower that sets the order of repayment, decides who controls the collateral, and limits what each lender can do if the borrower runs into trouble. These contracts show up in leveraged buyouts, syndicated loans, and any deal where senior and junior debt sit on top of the same pool of assets. Settling the hierarchy in writing, before anything goes wrong, keeps creditors from suing each other over the collateral later.
Who Signs One and Why
The agreement organizes lenders into a pecking order. At the top is the senior creditor, usually a bank providing an asset-based revolver or a large term loan. The senior lender expects to be repaid first and, in exchange for that protected position, charges the borrower a lower rate.
Below sits the junior or subordinated creditor. Its loan is intentionally structured to rank behind the senior debt, and it commonly takes the form of a second-lien term loan, subordinated notes, or a mezzanine instrument. The junior lender accepts the higher risk because it earns a materially higher interest rate.
Mezzanine lenders sit between traditional debt and equity. Their financing is often unsecured and can convert to an ownership stake if certain triggers hit. The intercreditor agreement has to pin down exactly where mezzanine debt falls in the stack, which is frequently below even the junior secured debt. Once those roles are fixed, the rest of the agreement’s machinery has something concrete to enforce.
How Lien Priority Works
Lien priority decides which creditor can claim specific collateral if the borrower defaults. Under the Uniform Commercial Code, competing security interests in the same collateral generally rank by whichever creditor filed or perfected first.1Legal Information Institute. Uniform Commercial Code 9-322 – Priorities Among Conflicting Security Interests in and Agricultural Liens on Same Collateral The senior lender typically files a UCC-1 covering substantially all of the borrower’s assets, locking in that first-in-time position.
The intercreditor agreement layers a contract on top of that statutory rule. The UCC explicitly lets a creditor subordinate its own priority by agreement.2Legal Information Institute. Uniform Commercial Code 9-339 – Priority Subject to Subordination So even when the junior lender also files a UCC-1 on the same collateral, the intercreditor agreement binds it to a second-priority position. In practice, the junior creditor can only reach the collateral’s value after the senior debt has been paid off from those same assets.
The Payment Waterfall
Lien priority governs the collateral. Payment priority governs the cash. The intercreditor agreement builds a payment waterfall that dictates the order in which money, whether from operations or asset sales, flows to the creditors. Senior debt gets paid first, in full, before a dollar reaches the junior lenders.
The junior creditor agrees to a standstill on receiving principal, interest, and fee payments until the senior debt is discharged. The agreement will carve out narrow exceptions, such as certain administrative fees or payments funded by new equity contributions rather than operating cash flow. Everything outside those carve-outs flows to the senior lender.
The teeth behind the waterfall are turnover provisions. If the borrower pays the junior lender out of turn, whether by mistake or design, the junior lender has to hold those funds in trust and forward them to the senior creditor. Courts have enforced these provisions and awarded damages against junior creditors who kept payments they should have turned over.
What Happens When the Borrower Defaults
Default is where the intercreditor agreement earns its keep. The agreement hands the senior creditor exclusive control over enforcement: the right to accelerate the debt, seize collateral, and run a sale. The junior lender’s hands are tied by a standstill.
The Standstill Period
Once the junior creditor notifies the senior creditor of a default, a clock starts. During the standstill, which typically runs 90 to 180 days, the junior creditor cannot take any enforcement action against the borrower or the collateral. The senior lender gets room to pursue a controlled strategy, whether that means a workout, a sale process, or foreclosure, without a second creditor creating chaos.
While the standstill is running, the senior creditor can sell or otherwise dispose of the collateral in any commercially reasonable manner, and the junior creditor agrees not to contest the process. If the junior lender jumps the gun and captures any proceeds, those funds have to be turned over to the senior creditor.
Automatic Lien Release
One of the more consequential provisions covers what happens to the junior lender’s lien when the senior lender sells collateral. A typical intercreditor agreement provides that when the senior creditor exercises remedies and disposes of collateral, the junior lender’s lien on that collateral is automatically and unconditionally released. The junior creditor keeps its lien only on whatever proceeds remain after the senior debt has been satisfied.3U.S. Securities and Exchange Commission. Amended and Restated ABL Intercreditor Agreement The agreement often goes further, appointing the senior lender as the junior lender’s agent and attorney-in-fact to sign release documents if needed.
This is a large concession by the junior creditor and often a point of intense negotiation. Some deals include protections, such as requiring an independent valuation or fairness opinion before the senior lender can sell collateral at a price that would wipe out the junior lender’s recovery. Whether those safeguards appear depends on the relative bargaining power of the lenders when the agreement is drafted.
Cure Rights and Purchase Options
The junior creditor does get a few defensive tools. The most important is the cure right: the ability to inject money, usually as equity, to fix a default on the senior debt. If the borrower breaches a financial covenant and the sponsor isn’t willing to put in more capital, the junior lender can step in and make the required payment, blocking the senior lender from accelerating and seizing collateral.
Cure rights come with limits. A common structure caps total cures at three or four over the life of the loan, with no more than two in a single year and no consecutive quarterly cures. Senior lenders accept the mechanism because new money benefits everyone, but they resist letting the junior lender prop up a failing borrower forever. The junior creditor may also be given the right to buy the senior debt outright at par plus accrued interest, stepping into the senior lender’s shoes and taking control of enforcement.
Covenants and Consent Rights During the Loan
The agreement shapes the ongoing relationship between creditors, not just the endgame. One heavily negotiated area is the restriction on additional borrowing. The agreement makes sure the borrower cannot take on new debt that ranks equal to or ahead of the existing senior debt, protecting the hierarchy everyone agreed to at closing.
Categories of permitted debt are carved out, typically ordinary trade payables, capital leases, and modest working capital facilities. Anything outside those categories needs the senior creditor’s consent.
Consent rights also restrict what the junior creditor can do with its own loan documents. Before amending its loan agreement in a way that could harm the senior creditor’s position, the junior lender needs approval. Amendments that shorten the maturity of the junior debt, increase the interest rate, or alter the collateral package all fall into this bucket. The junior creditor is also often barred from waiving borrower defaults without the senior creditor’s permission, which stops the junior lender from keeping a struggling borrower alive longer than the senior lender wants.
Assignment restrictions round out the protections. If the junior lender sells its loan position, the intercreditor agreement typically requires the buyer to be bound by the same terms. The priority structure travels with the debt.
How Bankruptcy Changes the Picture
When the borrower files for bankruptcy, the intercreditor agreement doesn’t disappear. Federal law expressly provides that a subordination agreement is enforceable in bankruptcy to the same extent it would be enforceable outside of bankruptcy.4Office of the Law Revision Counsel. 11 USC 510 – Subordination Bankruptcy courts interpret these agreements under state contract law, following what the parties clearly intended.
Bankruptcy courts will not, however, let an intercreditor agreement override core protections in the Bankruptcy Code. The clearest limit involves voting rights. Under the Code, every holder of an allowed claim has the right to vote on a Chapter 11 reorganization plan.5Office of the Law Revision Counsel. 11 USC 1126 – Acceptance of Plan Courts have consistently struck down intercreditor provisions that try to transfer or assign a junior creditor’s plan-voting rights to the senior lender. That statutory right belongs to the claim holder and can’t be bargained away in advance.
Other provisions hold up better. Courts have upheld intercreditor terms that stop junior creditors from contesting senior claims or engaging in obstructionist behavior during the case. Restrictions on seeking the appointment of an examiner have also survived when the agreement explicitly barred the junior creditor from exercising rights or remedies without the senior lender’s consent. The line courts draw is between restricting how a junior creditor participates in the process, which is generally allowed, and stripping away a statutory right entirely, which is not.
Unitranche Deals and Agreements Among Lenders
Not every multi-lender structure uses a traditional intercreditor agreement. Unitranche financing, common in middle-market deals, bundles senior and junior debt into a single loan with a blended interest rate. To the borrower, there is one credit facility and one set of loan documents. Behind the scenes, the lenders split the economics through a separate contract called an Agreement Among Lenders.
An Agreement Among Lenders functions much like an intercreditor agreement, with one critical difference: the borrower is typically not a party to it and may not even know its terms. The agreement splits the lender group into “first-out” and “last-out” tranches. First-out lenders take a discount to the blended rate and get repaid first. Last-out lenders earn a premium over the blended rate in exchange for waiting longer and absorbing more risk.
The Agreement Among Lenders governs the payment waterfall, allocates voting rights, and decides who controls enforcement after a default. Amendments to the loan documents often require a majority of both groups. Some structures give the last-out lenders control over day-to-day decisions unless a leverage threshold is breached, at which point control shifts to the first-out group whose recovery is now genuinely at risk.
Because the borrower sits outside the Agreement Among Lenders, unitranche loan documents typically lack the override provisions found in traditional intercreditor agreements. In a standard structure, the intercreditor agreement explicitly says it prevails over the loan documents if the two conflict. That mechanism doesn’t work when the borrower doesn’t know the side agreement exists, which can create real confusion in a restructuring about where control actually rests.