Meaning
Documentation defining the relative rights and priorities of different lenders governs their interaction regarding a shared borrower. An intercreditor agreement limits the ability of junior lenders to take independent enforcement action. This document provides a roadmap for how money is distributed during a liquidation or sale.
It dictates which creditor has the first claim on specific assets or cash flows.
Priority Conflict
Senior lenders insist on being paid first and having first access to the collateral. Junior lenders accept a secondary position in exchange for higher interest rates. This hierarchy dictates which creditor the founder must satisfy first during a cash crunch.
Standstill Clause
This provision prevents a junior creditor from foreclosing on the company for a set period. It gives the senior lender time to work out a solution with the founder without the threat of a sudden bankruptcy. During this time, the founder is often stuck in a holding pattern, unable to sell assets or take on new debt while the lenders argue over their respective rights.
Waterfall Allocation
The agreement specifies the exact order in which proceeds from a sale are divided. If the sale price is low, the junior lenders and the founder receive nothing. This structure places the risk of value loss on the equity holders and subordinate debt.
