Meaning
Contractual agreements between lenders establish the hierarchy of repayment and the distribution of collateral proceeds during a default. An intercreditor subordination deed binds a junior lender to defer its claims until a senior lender has been paid in full. This document prevents the junior party from taking enforcement action that could destabilize the project or the borrower.
Both parties sign the agreement to clarify their rights before any funds are disbursed.
Payment Waterfall
Sequence of cash distributions determines how much of the revenue is available to each tier of debt. An intercreditor subordination deed specifies that the senior debt service takes precedence over the junior interest payments. This structure protects the primary lender from cash flow shortages caused by the servicing of subordinate loans.
Standstill Provision
Clauses that restrict the junior lender from initiating legal proceedings provide the senior lender with time to manage a restructuring. During a default event (the intercreditor subordination deed typically imposes a waiting period of several months). This delay ensures that a single creditor cannot force the entire enterprise into liquidation without the consent of the senior party.
The senior lender uses this window to negotiate with the borrower or to seek new investment.
Enforcement Right
When the standstill period expires (the junior lender may eventually pursue its own remedies against the assets). An intercreditor subordination deed limits these actions to those that do not interfere with the senior security. Final recovery for the junior lender remains contingent on the senior debt being fully extinguished.
