Meaning
Legal agreements establish the relative rights and payment priorities among multiple lenders who have provided financing to the same borrower. An intercreditor deed dictates which party receives payment first during a liquidation and who has the right to control the enforcement process. It defines the relationship between senior and subordinated debt holders to prevent conflicting actions during a default.
The document ceases to govern once all participating debts are fully discharged or the agreement is formally terminated.
Priority Structure
The allocation of proceeds from the sale of assets is the central focus of an intercreditor deed. Senior lenders generally hold the first claim on primary assets while junior lenders agree to wait until those claims are satisfied. This hierarchy is essential for complex capital structures where different types of debt coexist.
Without a clear deed, lenders would face lengthy court battles to determine their ranking.
Dispute Resolution
Specific clauses in an intercreditor deed prevent individual lenders from taking unilateral actions that could harm the collective interest. For example, a standstill provision might stop a junior lender from suing the borrower for a set period while the senior lender attempts a restructuring. This coordination maintains order and preserves the value of the business as a going concern.
The agreement provides a roadmap for cooperation during periods of financial stress.
Subordination Framework
Contractual subordination within an intercreditor deed ensures that the risk profile of each loan is reflected in its potential for recovery. Junior lenders accept a lower priority in exchange for higher interest rates or other financial benefits. This framework allows the borrower to access more capital by offering different levels of security to different investors.
The integrity of this ranking is the basis for the pricing of the debt in the secondary market.
