When it comes to financing a project, multiple lenders may be involved. In such cases, it is important to have an intercreditor and subordination agreement in place to clearly define the rights and obligations of each lender.
An intercreditor agreement is a contract between two or more lenders that sets out their respective rights, priorities, and obligations in relation to a borrower. This agreement is typically used in situations where there are senior and junior lenders, such as in a mezzanine financing deal or a subordinated debt transaction.
The intercreditor agreement lays out the order in which the lenders will be repaid in case of default or bankruptcy by the borrower. The senior lender, who has priority over the junior lender, will receive repayment first. The junior lender will only receive repayment after the senior lender has been fully repaid.
A subordination agreement is a specific type of intercreditor agreement that pertains to the subordinate lender. This agreement specifies that the subordinate lender agrees to relinquish its priority status to the senior lender. This means that in the event of a default, the senior lender will be repaid first, and the subordinate lender will only receive repayment after the senior lender has been fully repaid.
The purpose of an intercreditor and subordination agreement is to allow multiple lenders to work together while clearly delineating their rights and obligations. By establishing a clear hierarchy of repayment, lenders are better protected in case of borrower default or bankruptcy.
For borrowers, having an intercreditor agreement in place can make financing more accessible. Because an intercreditor agreement clearly defines each lender`s role, it can make it easier for borrowers to secure multiple sources of financing. The agreement can also help to ensure that lenders are working together and not against each other, which can be beneficial to the borrower.
In summary, an intercreditor and subordination agreement is a crucial tool for lenders and borrowers alike. By establishing clear guidelines for repayment and priority, lenders are protected in case of default, and borrowers can access multiple sources of financing. As such, it is important for all parties involved in a financing deal to understand the provisions of the intercreditor agreement and to ensure that it is well-drafted and comprehensive.