Finance term
Intercreditor Agreement
Also known as: ICA, inter-creditor agreement, lender agreement
Definition
An intercreditor agreement is a multi-lender contract defining the rights, priorities, and remedies among two or more lenders to the same borrower — covering payment waterfalls, collateral access, enforcement coordination, and voting rights. Used in syndicated loans and mezzanine financings.
Detailed explanation
When a borrower has multiple lenders secured by overlapping collateral, lenders need to agree on rules of the road before a default occurs. The intercreditor agreement (ICA) governs: who gets paid first (priority waterfall), who can enforce against collateral (and when), what triggers a standstill period, how lenders vote on amendments or waivers, and what happens in bankruptcy.
Key ICA provisions include: (1) Payment blockage — senior lender can block junior lender from receiving payments during a senior event of default. (2) Standstill — junior lender agrees not to enforce its remedies against collateral for a defined period (typically 90–180 days) after senior default, giving senior lender time to take control. (3) Purchase option — junior lender may have the right to purchase senior lender's position at par to gain control. (4) Bankruptcy provisions — who can oppose a sale, demand cash collateral, or submit a reorganization plan.
Intercreditor agreements are standard in leveraged buyouts (LBOs), commercial real estate transactions with multiple debt tranches (senior + mezzanine + preferred equity), and broadly syndicated loan facilities with institutional lenders. For SMB borrowers, ICAs are most commonly encountered in SBA 504 transactions (involving both an SBA-guaranteed CDC debenture and a first-mortgage bank loan) and in deals involving seller financing alongside institutional debt.
The ICA is negotiated among lenders, often without the borrower's direct involvement in drafting — though borrowers typically must consent to its terms. Understanding the ICA helps borrowers anticipate how their lenders will interact in a distress scenario and which lender controls workout negotiations.
SBA 504 loans show the intercreditor mechanics in their most standardized form: SBA Form 2287, the Third Party Lender Agreement (https://legacy.sba.gov/document/sba-form-2287-third-party-lender-agreement), is the mandatory intercreditor contract every 504 deal with an outside bank lender must execute — it fixes the bank's lien as senior to the CDC/SBA's, sets the bank's rights and required notice before it can move against shared collateral, and caps how far the bank can raise its rate if the borrower defaults, all without a single negotiated word between the parties since the SBA's form terms are fixed.
◈ Worked example
- LBO financing: $10M senior term loan + $3M mezzanine note secured by same assets. ICA terms: (a) mezzanine payments blocked if senior in default; (b) 120-day standstill for mezzanine enforcement after senior default; (c) mezzanine can purchase senior position at par ($10M) to gain control; (d) senior lender controls any bankruptcy plan vote.
- SBA 504 dual structure: Bank provides $2M first mortgage (50% of project). SBA/CDC provides $1.4M second mortgage (35%). Borrower contributes $600K (15%). ICA: bank maintains 1st lien priority; CDC takes 2nd lien. In foreclosure: bank recovers first. CDC, as government-backed lender, accepts subordinated position in exchange for fixed 20-year rate.
- Commercial real estate: $5M senior mortgage + $2M mezzanine loan. Borrower defaults. ICA standstill: mezzanine cannot foreclose for 90 days. In 90-day window, senior lender begins foreclosure, acquires property. Mezzanine lender's claim converts to unsecured claim against foreclosure sale proceeds in excess of senior loan ($7M property value − $5M senior = $2M to mezzanine — full recovery in this scenario).
Common questions
The most-asked questions about Intercreditor Agreement — answered straightforwardly.
Does the borrower sign the intercreditor agreement? +
The ICA is primarily an agreement among lenders, but borrowers typically must consent to it (often as a signing party in the 'acknowledged and agreed' section). Some ICAs require affirmative borrower acknowledgments for key provisions (standstill, payment blockage) to be enforceable against the borrower. Borrowers should review the ICA to understand how their lenders will interact in default scenarios.
What is a standstill in an intercreditor agreement? +
A standstill provision prohibits the junior lender from taking enforcement actions (foreclosure, collection suit, exercise of remedies) against the borrower or collateral for a specified period after a default event. Standstill periods range from 90 to 180 days. During the standstill, the senior lender has exclusive control of enforcement. This protects orderly collateral liquidation and prevents a race to the courthouse among multiple secured creditors.
How does an intercreditor agreement affect workout negotiations? +
The ICA determines which lender controls the negotiation. Senior lenders with ICA enforcement rights effectively control the timeline — they can accelerate, foreclose, or offer forbearance, and junior lenders are contractually bound to stand aside. Borrowers seeking a workout must engage the controlling senior lender first. The ICA also affects what terms are possible in a loan modification — amendments to the senior loan that affect the junior lender's position may require junior lender consent.
Further reading
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https://clearvaluelending.com/glossary/intercreditor-agreement