How Do Intercreditor Agreements Work
Intercreditor agreements are becoming more and more common in the world of financing. These agreements are contracts that determine the rights and obligations of two or more creditors who have an interest in the same asset, project, or borrower. The agreement outlines the relationship between the creditors and the order in which each creditor will receive payment.
Intercreditor agreements are essential in situations where different creditors hold different types of debt with different levels of priority. For example, a borrower might have a first lien mortgage with one creditor and a second lien mortgage with another creditor. If there is a default, the first lien creditor will have priority over the second lien creditor when it comes to receiving payment.
The intercreditor agreement will set out how payments are to be made between the two creditors. It will also specify the terms of the security interest, so each creditor knows what they are entitled to in case of a default. In some cases, the agreement will also include provisions for sharing the collateral and decision-making processes.
One important aspect of an intercreditor agreement is the subordination clause. This clause determines which creditor has priority over the other. In the above example of a first and second lien mortgage, the agreement might state that the second lien creditor is subordinated to the first lien creditor. This means that if there is a default, the first lien creditor will be paid first, and the second lien creditor will only receive payment if there is anything left over.
It is important to note that intercreditor agreements can be complex and should be drafted by experienced legal professionals. They require a deep understanding of the applicable laws and regulations and the specific needs of the parties involved.
In conclusion, intercreditor agreements are an essential tool in the world of financing. They help ensure that different creditors with different levels of priority can work together effectively and receive payment in the correct order. If you are considering an intercreditor agreement, it is important to work with experienced legal professionals who can help you draft an agreement that meets your needs and protects your interests.
