Intercreditor Agreement Explained: Senior Debt, Mezzanine and Unitranche
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Intercreditor Agreement Explained: Senior Debt, Mezzanine and Unitranche
An intercreditor agreement is the contract that governs the relationship between multiple lenders to the same borrower. It controls payment priority, security sharing, enforcement rights, standstill periods, voting thresholds, turnover obligations and how recoveries are distributed after default.
Request a QuoteWhat Is an Intercreditor Agreement?
An intercreditor agreement, often shortened to ICA, sets the rules between creditors when a borrower has more than one layer of debt. It is common in senior debt plus mezzanine structures, first lien and second lien financings, unitranche deals, acquisition finance, leveraged finance and project finance.
The Borrower May Not Control the Fight
When a borrower defaults, the key dispute is often not only borrower versus lender. It can become senior lender versus junior lender, first-out lender versus last-out lender, secured lender versus unsecured lender, or hedging bank versus term lender.
LexisNexis describes an intercreditor agreement as an agreement setting out how creditors share rights and priorities in relation to a borrower’s debt and security package. In unitranche transactions, law firm commentary commonly refers to the related document as an agreement among lenders, or AAL, which allocates rights between first-out and last-out lenders. See LexisNexis on intercreditor agreements and Taft’s unitranche lending overview.
Financely View
The intercreditor agreement is where the capital stack becomes real. A term sheet may say “senior debt,” “mezzanine,” “unitranche,” or “super senior revolver,” but the ICA decides who gets paid first, who can enforce, who must wait, who controls amendments and who takes losses when the deal breaks.
Where Intercreditor Agreements Are Used
Senior + Mezzanine
Senior lenders receive priority payment and enforcement rights. Mezzanine lenders accept subordination and standstill restrictions in exchange for higher return.
First Lien + Second Lien
Both lender groups may be secured, but first lien lenders have priority over collateral proceeds and usually stronger enforcement control.
Unitranche / FOLO
The borrower sees one facility, while first-out and last-out lenders allocate economics, control rights and loss sharing behind the scenes.
Project Finance
Senior lenders, hedge banks, LC providers, mezzanine lenders and account banks need shared rules around security, voting and enforcement.
Core Terms Inside an Intercreditor Agreement
| Clause | What It Controls | Why It Matters |
|---|---|---|
| Payment priority | Order in which lenders receive principal, interest, fees, default interest and recoveries. | Determines economic seniority and expected recovery after default. |
| Lien priority | Which creditor has first claim over collateral and security proceeds. | Critical in asset-backed, leveraged and project finance transactions. |
| Enforcement control | Which lender group can accelerate, enforce security, appoint receivers or direct the security agent. | Controls who leads the workout when the borrower defaults. |
| Standstill period | Period during which junior creditors cannot enforce remedies even after a default. | Gives senior lenders time to control recovery strategy. |
| Turnover provisions | Requirement that junior creditors hand over payments received in breach of the agreed waterfall. | Protects senior lender priority if money reaches the wrong creditor. |
| Voting thresholds | Who can approve amendments, waivers, disposals, new debt, enforcement or restructuring terms. | Prevents one lender class from changing economics without required consent. |
| Release mechanics | How collateral can be released during asset sales, refinancing or enforcement. | Important for acquisitions, refinancings, disposals and credit-bid scenarios. |
| Insolvency provisions | Rules for bankruptcy, administration, liquidation, DIP financing, proof of debt and voting. | Determines creditor conduct when ordinary enforcement is replaced by insolvency law. |
Senior Debt vs Mezzanine Intercreditor Logic
| Issue | Senior Lender Position | Mezzanine Lender Position |
|---|---|---|
| Payment | Receives scheduled debt service first. | May be paid only if senior debt is current and no blockage event exists. |
| Security | Usually first-ranking security over core collateral. | May be unsecured, structurally subordinated or second-ranking secured. |
| Enforcement | Usually controls enforcement and security realization. | Usually subject to standstill and limited remedies. |
| Yield | Lower return because of lower risk and higher priority. | Higher return because of subordination, delayed payment and weaker recovery position. |
| Information rights | Receives full reporting, compliance certificates and default notices. | Negotiates access to information, but may receive less control than senior creditors. |
Unitranche and Agreement Among Lenders
In a unitranche facility, the borrower may sign one credit agreement and make one payment to one lender group. Behind the scenes, lenders may divide the facility into first-out and last-out positions through an agreement among lenders. The AAL controls economics, payment waterfall, voting, enforcement, buyout rights and loss allocation between lender groups.
Important distinction: in a classic intercreditor agreement, the borrower often has visible senior and junior debt layers. In a unitranche AAL, the borrower may see one blended facility while the lenders privately allocate first-out and last-out economics among themselves.
Why Borrowers Should Care
| Borrower Issue | Intercreditor Impact |
|---|---|
| Amendments | Some changes may require consent from multiple creditor classes, delaying waivers or add-on financing. |
| Refinancing | Existing lenders may control payoff, lien release, prepayment premium and permitted replacement debt terms. |
| Asset sales | Sale proceeds may need to be applied through a strict waterfall before the borrower receives surplus cash. |
| Default management | Junior creditors may be blocked from acting while senior lenders control enforcement or restructuring negotiations. |
| New money | Incremental facilities, rescue financing or DIP-style financing may require intercreditor consent and priority negotiations. |
Intercreditor Agreement in Project Finance
In project finance, an intercreditor agreement often coordinates senior lenders, working capital lenders, hedge providers, LC issuers, mezzanine lenders, security trustees, account banks and sometimes bondholders. It usually interacts with the common terms agreement, facility agreements, account bank agreement, direct agreements, security documents and cash waterfall.
| Project Finance Party | Intercreditor Concern |
|---|---|
| Senior lenders | Priority repayment, enforcement control, reserve accounts and security sharing. |
| Hedge banks | Ranking of hedge break costs, termination payments and secured obligations. |
| LC providers | Priority for reimbursement obligations, cash collateral and drawing mechanics. |
| Mezzanine lenders | Subordination, payment blockage, enforcement standstill and permitted cure rights. |
| Security trustee | Holds and enforces security according to creditor instructions and waterfall priorities. |
Common mistake: sponsors negotiate headline loan amounts and pricing before understanding creditor control. A cheaper senior lender can become expensive if the intercreditor package blocks flexibility, refinancing, asset sales or rescue capital.
Related Financely pages include Private Credit , Unitranche vs Senior-Mezz , Leveraged Finance Advisory Services , Project Finance , and Project Finance Deal Packaging.
For external reference, see Reuters on unitranche debt structures and Baker Donelson’s borrower and lender discussion of unitranche structures.
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Financely helps sponsors prepare lender-ready financing packages involving senior debt, mezzanine, unitranche, ABL, project finance, acquisition finance and structured private credit facilities.
Request a QuoteFrequently Asked Questions
What is an intercreditor agreement?
An intercreditor agreement is a contract between lenders that governs payment priority, security ranking, enforcement rights, voting, standstill periods and recovery sharing when several creditors finance the same borrower.
Is an intercreditor agreement signed by the borrower?
Sometimes. In some structures, the borrower acknowledges or joins certain provisions. In others, the core agreement is mainly between lenders, security agents and other finance parties.
What is the difference between an intercreditor agreement and an agreement among lenders?
An agreement among lenders is commonly used in unitranche financing to allocate rights between first-out and last-out lenders. An intercreditor agreement is the broader term used across senior, mezzanine, first lien, second lien and project finance structures.
Why do mezzanine lenders accept standstill periods?
Mezzanine lenders accept standstill periods because they are junior to senior lenders. In exchange for weaker enforcement rights and lower repayment priority, they usually receive higher pricing or equity-linked economics.
Does Financely draft intercreditor agreements?
Financely supports structuring, lender readiness and transaction preparation. Legal drafting must be handled by qualified counsel in the relevant jurisdiction.
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