Intercreditor agreements set the rules among creditors that share the same collateral. They decide who controls enforcement, how proceeds flow, and when junior lenders must stand aside. They also define lien subordination, which ranks security interests without altering the borrower’s core payment obligations to each creditor.
In practice, outcomes get locked in long before any default. Lenders who draft tight collateral definitions, perfect cash control, and protect their sacred rights recover more when stress hits. Those who trust vague language and goodwill learn expensive lessons when documents get tested.
Three structures dominate direct lending today. Each allocates control and economics differently, and the intercreditor agreement makes the trade-offs enforceable.
First lien and second lien deals rank security interests clearly. The first lien agent controls enforcement and gets paid first from collateral proceeds. The second lien stands aside during the standstill period and receives recoveries only after the first lien is paid in full.
Split-collateral structures give asset-based lenders first liens on inventory and receivables while term lenders take priority in fixed assets and intellectual property. This reflects different priorities: ABL lenders want quick control over working capital and short standstills, while term lenders value control over enterprise sales and longer standstills.
Agreement-among-lenders unitranche deals create first-out and last-out tranches under shared security. The first-out tranche is paid first up to an agreed cap, and the last-out tranche accepts longer standstills and subordination of enforcement in exchange for higher return.
These structures live beside but independent from the credit agreement. Borrowers are usually not parties to the intercreditor agreement and cannot amend its terms.
Collateral definitions drive ranking. If senior and junior security agreements describe assets differently, gaps can appear that invite disputes and value leakage. The fix is simple: use identical descriptions across documents.
For example, if a senior lender takes a security interest in “all accounts” but a junior uses a broader accounts definition, the junior can accidentally prime the senior on assets that fall inside the junior definition but outside the senior’s. This problem occurs more often than lenders admit.
For deposit accounts, only “control” under UCC Article 9 provides first priority. Perfection by filing alone leaves the senior behind any bank exercising setoff or any junior that later obtains a control agreement. Securities accounts need control under Article 8. Intellectual property is primarily perfected through UCC filings, with federal recordations for trademarks and patents providing notice benefits.
The intercreditor agreement specifies who can direct remedies when borrowers default. Senior lenders typically control shared collateral enforcement during the standstill and until paid in full. Junior lenders agree not to enforce for a defined period, often 90 to 180 days for term loans and shorter periods for ABL facilities that rely on fast-moving collateral.
Standstills give seniors exclusive control over timing and strategy. Juniors cannot block senior-supported sales, object to cash collateral use, or withhold lien releases at closing of a senior-directed sale. These limits are priced into junior returns.
Split-collateral deals require precise triggers. ABL lenders may control current asset remedies as soon as cash dominion kicks in, while term lenders can direct going-concern sale processes after the standstill expires. Clarity on triggers reduces disputes when timing is critical.
Intercreditor agreements hardwire how enforcement proceeds and bankruptcy distributions flow. The distribution waterfall usually pays senior agent fees first, then senior secured claims, then junior agent fees and junior secured claims. Many agreements cap hedging and cash management obligations so they do not absorb unexpected recovery dollars.
Consider a basic example. Assume shared collateral sells for 100 million dollars. Senior agent expenses are 3 million dollars. Senior loans equal 82 million dollars. Junior expenses are 2 million dollars, and junior claims total 40 million dollars. The waterfall pays 3 million dollars to the senior agent, 82 million dollars to senior claims, 2 million dollars to the junior agent, and the remaining 13 million dollars to junior claims. The junior class is left with 27 million dollars unpaid. This is the simple logic the waterfall enforces.
Turnover provisions backstop the waterfall. If a junior receives a payment that violates the waterfall, it must turn the proceeds over to the senior agent for proper allocation. These mechanics apply both in and out of court. For split-collateral, separate waterfalls by asset class keep recoveries in the correct silo.
If you are new to allocations, you might want to check out my article on distribution waterfall.
Uptier exchanges taught lenders to designate certain rights as sacred. Sacred rights can be changed only with consent from each affected lender, not with a simple majority. Lien priority sits at the top of this list. Pro rata sharing follows. Collateral scope, standstill periods, turnover, and lien release mechanics also warrant sacred status.
Borrowers and sponsors have tried to bypass intercreditor limits with “open market” exchanges. Modern drafting defines open market purchases narrowly and requires affected-lender consent for any debt that jumps senior in payment or lien ranking. Cross-document sacred rights help too. Both the credit agreement and the intercreditor agreement should require affected-lender consent for any change that adjusts lien priority, alters pro rata sharing, or releases substantially all collateral.
Cash is the fastest-moving asset a borrower has. For deposit accounts, control beats filing under Article 9. Senior lenders who skip deposit account control agreements at closing risk learning that a bank exercised setoff or a junior later obtained control first.
ABL structures rely on automatic cash dominion triggers tied to objective tests such as availability shortfalls and payment defaults. Discretionary triggers invite debate when certainty is needed most. Securities accounts holding pledged equity or investment securities need control agreements. For LLC interests, consider opting into Article 8 to access the control framework.
During documentation or an early warning signal, run this quick audit to identify control gaps before they cost you:
Rule of thumb: If you cannot produce a signed control agreement on demand, assume you do not have first priority on that cash.
Chapter 11 typically respects contractual subordination if drafted correctly. Intercreditor agreements should anticipate the procedural realities of court.
Buyout rights let one class purchase another class’s debt at par plus accrued amounts after triggers such as acceleration or the start of a standstill. These rights provide exit liquidity and break deadlocks when strategies diverge.
UK and European financings commonly use LMA-style intercreditor deeds with a security agent or trustee holding debentures or local-law security. Parallel debt structures may be needed where a single creditor of record is required.
Restructuring plans under UK Part 26A allow cross-class cramdown if the court finds dissenting classes are no worse off. Intercreditor voting and consent provisions should reflect how agents exercise secured claims in such plans. Perfection rules also vary widely. Canadian PPSA concepts differ from the UCC. Civil law jurisdictions can restrict share pledges, financial assistance, and upstream guarantees that US lenders expect as standard.
Certain errors recur across workouts. Eliminating them at signing preserves value later.
Intercreditor agreements determine how fees and expenses enter the waterfall. Senior agent and collateral professional fees typically sit at the top and include workout and bankruptcy advisors. Management fees, success fees, and transaction bonuses may or may not be secured, depending on negotiation.
Clarity prevents surprises. If secured hedging exposure is capped at 5 million dollars but actual exposure reaches 6 million dollars, the documents should state whether the excess drops below junior secured claims or shares pari passu with junior debt. Spell out caps, baskets, and priority for each bucket that can draw on recoveries.
Strong intercreditor packages are consistent, simultaneous, and complete. Execute the intercreditor agreement together with senior and junior security documents to prevent temporal priority fights. Keep defined terms consistent across documents, especially “cash collateral,” “discharge of senior obligations,” and “refinancing debt.”
Resolve key business points at term sheet stage so drafting is fast and precise:
Information rights should match junior risk while avoiding borrower duplication. Route information through agents instead of direct borrower obligations when possible. Keep transfer restrictions aligned across debt instruments so no party can seed positions with friendly holders to skew class votes. Apply disqualified lender lists across all secured classes and carry them into AAL structures.
Use class-based voting for changes that uniquely burden a class. Each affected class should have veto rights for collateral scope changes, lien priority adjustments, or alterations to pro rata sharing.
Compliance failures can erode recoveries. Agents should complete know-your-customer and anti-money-laundering checks at closing and on transfers, and monitor sanctions issues for asset sales. Withholding tax and FATCA rules apply to distributions. Turnover provisions should state that withheld taxes are not treated as “received” for turnover purposes. For junior tranches with original issue discount or PIK toggles, align waterfall allocations with tax accruals and define any cash-trap mechanics that affect first-out caps in AALs.
Private credit assets under management reached roughly 1.7 trillion dollars globally in 2023. Larger hold sizes and tighter clubs raise the frequency and stakes of intercreditor disputes. Platform lenders should standardize playbooks with anti-uptier protections, deterministic control triggers, and perfected cash control.
As cycles normalize and distressed debt investing activity rises, well-drafted intercreditor agreements separate winners from losers. The lenders who prevail do so by writing clear agreements while borrowers are healthy, not by litigating ambiguity after the fact.
Intercreditor agreements are outcome documents. Precision today protects recovery tomorrow. Focus on identical collateral definitions, perfected cash control, sacred rights with affected-lender consent, and unambiguous enforcement and waterfall mechanics. When stress arrives, those disciplines will matter more than any promise of cooperation.
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