Meaning
Multi-party contractual arrangements that define the relationship between different classes of lenders establish the hierarchy of claims and rights in a shared collateral pool. An intercreditor deed governs how senior and junior creditors interact during the life of a loan. It prevents disputes by outlining which party has the first right to receive payments and direct enforcement actions.
This agreement is a standard requirement in debt-financed acquisitions and project finance.
Payment Priority
The document dictates the waterfall of payments during normal operations and after a default. Senior lenders must be paid in full before junior lenders receive any proceeds from the liquidation of assets. Any payments received by the junior lender in violation of this order must be turned over to the senior lender.
This subordination ensures that the senior debt carries a lower risk profile.
Security Enforcement
Junior creditors are restricted from taking independent action against the borrower. Under the intercreditor deed, the senior creditor has the sole right to decide when to accelerate the debt and foreclose on the assets. This centralization of control prevents chaotic, competing legal actions that could destroy the value of the business.
The junior lender must wait for the senior lender to act.
Standstill Period
To balance the power, junior lenders receive a limited window to act if the senior lender remains inactive. This standstill period usually lasts for several months, after which the junior lender can enforce its claims. Such a mechanism prevents the junior lender from being locked out indefinitely.
