Intercreditor Agreements: Key Areas of Negotiation

In today’s market, companies frequently secure financing from multiple lenders. This can create the need for an intercreditor agreement in which two or more lenders set out their relative rights and priorities regarding their common borrower. 

Below are five key areas of negotiation for Canadian intercreditor agreements:

1. Relative Priorities. In intercreditor agreements, both secured and unsecured lenders should agree on the order in which payment will be made on their obligations. Secured lenders should also agree on the priority of the security interests granted to each of them by the borrower. 
2. Access to Collateral. Lenders’ rights to access collateral are most relevant in a split collateral deal, in which security is taken over different assets of a shared borrower. Intercreditor agreements between fixed-asset and working-capital lenders often require working-capital lenders to compensate fixed-asset lenders for their occupation of the real property and to repair any damage caused to the fixed assets during their occupation (in the context of realization proceedings, for example). 
3. Payment Blockages. Most intercreditor agreements prohibit payments toward junior lenders’ principal while there is outstanding senior debt. Restrictions on interest payments, however, are often negotiated. 
4. Standstill Provisions. Standstill provisions give senior lenders control over enforcement processes. Standstill periods typically range from 90 to 365 days, depending on the type of debt and the lenders’ relative negotiating strengths. Junior lenders may also negotiate the ability to take basic protective steps during a standstill period, such as accelerating their debt and making demand for repayment. 
5. Assignment Rights. Intercreditor agreements typically restrict junior lenders from assigning their debt and security unless the assignee agrees to be bound by the intercreditor agreement, but place no similar assignment restrictions on senior lenders. Junior lenders may consider whether to accept this inequality, particularly if the agreement gives them access or other rights.

Have more than five minutes? Contact any member of our Commercial Real Estate group to learn more, or view our recent webinar on this topic.