An intercreditor agreement decides who gets paid first, who controls enforcement, and how cash moves when a borrower has multiple debt layers. In Europe’s sponsor-backed mid-market, unitranche loans, super senior revolvers, and mezzanine debt often share the same borrower and collateral. The payoff from a well-drafted stack is simple: faster decisions in stress, cleaner restructurings, and better recoveries.
A unitranche is one secured term loan split internally into first-out and last-out pieces under an agreement among lenders. By contrast, mezzanine is subordinated capital that sits below a senior facility, whether as second-lien, unsecured subordinated, or structurally subordinated instruments at holdco. In practice, the goal is to align priority and control across these pieces with clear rules that work under real-world pressure.
Why intercreditor terms set outcomes, not just definitions
Most European mid-market buyouts now anchor on private credit. Sponsors favor speed and flexibility, CFOs want one relationship and reliable liquidity, and super senior RCF banks insist on first claim to working capital and early enforcement control. Meanwhile, last-out lenders accept super senior priority but price for duration and restructuring influence, and mezzanine providers seek longer standstills, refi protection, and vetoes on priming. A modern intercreditor agreement that anticipates these incentives is an economic document as much as it is legal boilerplate.
Today, unitranche is the default for speed and certainty, while mezzanine debt fills specific needs like extra leverage, longer tenor, or bespoke capital structures. The one-line rule of thumb: the earlier you need cash and decisions, the higher up the stack control must sit.
Legal architecture and venues that actually work
Loan agreements, security trusts, and intercreditors are commonly governed by English law. Local-law security still matters and must be layered under a common security agent or parallel debt where required. Restructurings often use English schemes or Part 26A plans, with recognition now a fact-specific exercise post-Brexit.
- France: Security agents are recognized since 2022. Share pledges, Dailly assignments, and fiducie remain standard.
- Germany: Security agents are market practice. Real estate and receivables require formal perfection and sometimes notification.
- The Netherlands: Security agents now common. Legacy deals may retain parallel debt structures.
- Spain, Italy, Nordics: Expect public filings and local formalities, plus longer insolvency timetables that must be built into remedies planning.
For cross-border restructurings, English schemes and Part 26A plans can deliver cross-class cram-down with valuation evidence and fairness to dissenting creditors. Recognition leans on COMI analysis and local frameworks such as Germany’s StaRUG and the Dutch WHOA, with timelines measured in weeks to months.
Priority, waterfall, and control – how the pieces fit together
Unitranche with a super senior RCF: two-layer control map
A typical structure uses an external intercreditor agreement for ranking and a private agreement among lenders to split the unitranche internally.
- External ICA: The super senior is first on proceeds, then the unitranche. It allocates enforcement control, sets release mechanics, and governs turnover and shared cash sweeps.
- Agreement Among Lenders: The AAL divides economics between first-out and last-out sleeves and often hands eventual restructuring control to the last-out after initial standstills.
Mezzanine beneath a senior facility: classic subordination
Mezzanine usually sits under a senior facility under LMA-style intercreditor terms. Common building blocks include:
- Contractual subordination: Mezzanine payments and enforcement sit behind senior until seniors are paid in full.
- Standstill periods: Mezzanine must wait 90-180 days after a senior enforcement notice, with narrow insolvency carve-outs.
- Turnover: Any mezzanine recovery received early is turned over to senior until senior is whole.
- Reserved matters: Mezzanine approval is required for priming liens, collateral leakage, and extending senior maturity beyond mezzanine maturity without paydown.
What happens in practice when stress hits
Inside a unitranche intercreditor
- Blockage and standstill: The RCF controls enforcement after a payment default or borrowing base breach for 60-120 days. Once liquidity is stabilized, the last-out often leads the restructuring, provided super senior recoveries are protected.
- Payment pauses: While no event of default is open, unitranche interest and amortization pay through. If a default opens or liquidity triggers trip, payments pause. Clearly drafted cures and waivers prevent temporary covenant misses from choking cash.
- Collateral releases: The security agent can release collateral for permitted sales or enforcement where the super senior is paid or as set in a plan. Off-menu releases typically require last-out consent.
Inside a mezzanine intercreditor
- Payment blocks: Mezzanine interest is blocked during a senior default but catches up after cure.
- Standstill and enforcement: Mezzanine waits out a longer standstill. Insolvency exceptions are narrow and tailored.
- Turnover discipline: Early mezzanine proceeds are turned over to seniors until senior claims are satisfied.
- Consent rights: Mezzanine consent is reserved for priming, collateral scope, and maturity extensions beyond mezzanine maturity without paydown.
Security packages, guarantees, and collateral scope
Typical collateral includes share pledges, receivables, bank accounts with dominion and lockbox arrangements, and intra-group receivables. Real estate and IP coverage varies by jurisdiction. Subsidiary guarantees backstop the borrower and support cross-collateralization.
- Unitranche approach: All term lenders share in the same package. The super senior takes first proceeds from current asset collateral, with clear rules on springing dominion and sweeps. See common security packages norms.
- Mezzanine approach: Mezzanine may be second-lien or unsecured. If issued as holdco PIK notes, recovery rides on distributions from operating entities, subject to leakage controls.
Voting, amendments, transfers, and information flow
Voting within unitranche splits by first-out and last-out. All-lender matters such as collateral scope, guarantor releases, maturity, margin beyond pre-set caps, and transfer restrictions typically require both sleeves. First-out controls liquidity-related waivers that tie back to the super senior covenant set.
In mezzanine stacks, sacred rights give mezz a veto on priming, collateral releases, and extending senior maturity beyond mezzanine maturity without paydown. Senior lenders can waive day-to-day operating covenants within agreed baskets and thresholds.
Transfer provisions balance sponsor control and market liquidity. Disqualified lists apply across RCF, unitranche, and mezzanine, with broader transfer rights after default. An AAL may restrict first-out transfers to last-out affiliates to preserve voting balance. Information flows mirror control rights: super senior sees frequent borrowing base and cash reports; unitranche receives monthly and quarterly packs with board access under NDAs during defaults; mezzanine typically receives quarterly financials with enhanced access in standstill.
Economics and pricing that match control
Unitranche pricing blends first-out and last-out risk, usually with floors and OID. First-out takes a lower margin with faster paydown; last-out commands a higher margin and more back-end economics. Call protection for 12-24 months protects underwriting if the sponsor refinances early.
Mezzanine costs more and often includes cash or PIK toggle features to manage cash. Warrant kickers are rare in sponsor-grade deals; yield comes from coupon, OID, and call protection. In current private credit market outlook discussions, investors still price speed and certainty at a premium.
Illustrative example, not an offer: For a €300 million unitranche term loan with a €50 million RCF, the term might be benchmark + 625 bps with a 1.0 percent floor, 99 OID, and 1 percent upfront, split internally around +450 bps first-out and +775 bps last-out with 103-101 three-year call. A senior plus mezz stack might run at roughly +400 bps senior and 11 percent total mezz coupon with 98 OID, higher all-in cost but with more leverage capacity and longer tenor.
Accounting and tax: small drafts with big effects
Under IFRS 9, loans sit at amortized cost and OID amortizes via the effective interest method. PIK rolls into the effective interest rate unless features are exceptional. Holdco PIK can display equity-like traits but most mezz remains a liability for accounting purposes.
Tax focus points require early validation. Withholding rules differ by jurisdiction, and gross-up clauses usually shift the burden to the borrower unless lenders are excluded. Interest limitation regimes such as UK CIR or Germany’s Zinsschranke cap deductibility at about 30 percent tax-EBITDA. ATAD 2 anti-hybrid rules can deny deductions when instruments or entities mismatch. Intercompany mezzanine must be priced at arm’s length with robust substance and documentation.
Regulatory footing for loan-originating funds
Loan-originating AIFs face AIFMD II requirements, including leverage caps, risk retention for originated-and-sold loans, and enhanced risk management. Transposition timelines will vary by Member State, so managers should map internal policies and investor disclosures early. While lending monopolies have broadly eased, KYC, AML, and sanctions controls remain critical and are often baked into defaults and mandatory prepayments.
Enforcement and restructuring: pre-wire the playbook
When liquidity tightens, control determines the outcome. In unitranche stacks, the super senior RCF stabilizes cash first. Post-standstill, the last-out typically leads the plan, often equitizing part of its debt while the first-out remains whole. A well-crafted ICA and AAL pre-wire releases, rescue financing priority, and roll-ups so the deal can pivot quickly.
English Part 26A plans can cram down dissenting classes where the “no worse off” test is met, grounded in credible valuation. Continental tools such as StaRUG and WHOA can deliver analogous results, with different creditor thresholds and timelines. In practice, sponsors and lenders frequently prefer negotiated amend-and-extend solutions when the business remains fundamentally sound.
Mezzanine recoveries depend on subordination and collateral. Holdco PIK is often out of the money unless new money restarts the equity story. Second-lien mezz with robust anti-priming protections can negotiate reinstatement or a PIK-to-maturity stub to keep option value alive.
Risks and edge cases to eliminate early
- Hidden AAL drift: Align ICA with disclosed AAL principles that affect the borrower to avoid surprise control shifts.
- Priming leakage: Cap RCF upsizes, supply chain finance, and receivables facilities; add MFN-style protections on pari secured increments.
- Payment blockage creep: Keep events of default tight, define cures, and carve out technical breaches to preserve liquidity.
- Transfers to loan-to-own: Extend disqualified lists to successors and affiliates to maintain a stable club.
- Parallel debt enforceability: Lock local counsel sign-off and use tested precedents.
- Covenant ownership: Align springing maintenance covenants and joint triggers to speed waivers.
- Cash dominion gaps: Nail account pledges and control at signing, especially with local banks.
- Regulatory drift: Track AIFMD II transpositions and update mandates ahead of changes.
When each structure wins for sponsors and lenders
- Unitranche + super senior RCF: Best for speed, single decision-making, and add-on flexibility in businesses with €10-€75 million EBITDA.
- Senior + mezz: Best for higher headline leverage, longer maturities, or preserving existing bank groups even at a higher cost and coordination burden.
- Holdco PIK: Useful when operating-company covenants are tight or administrative simplicity is key, recognizing that recovery depends on upstream distributions and sponsor support.
Execution timeline, kill tests, and drafting levers
A typical unitranche new-money deal signs and funds in 6-8 weeks: term sheet and alignment on ICA and AAL principles, document drafting and local security scoping, and then closing with account control, KYC, and perfection. Senior-plus-mezz stacks run closer to 8-10 weeks due to tax work and second-lien sharing mechanics.
Run hard kill tests upfront: pledgeability gaps, subordination enforceability doubts, regulatory blocks, non-relievable withholding or hybrid risk, thin RCF headroom for the business model, or no credible restructuring path in likely venues. If any fail, change the structure or walk.
Drafting levers worth prioritizing include objective enforcement triggers, harmonized definitions across ICA, facilities, and the AAL, clearly ranked rescue financing, valuation and release rules for restructurings, and making sure borrower-facing AAL points are mirrored in the ICA. Finally, scale information and site rights by default status under robust confidentiality.
Data points to price in now
- Execution certainty: Alternative lenders remained active through 2024, with unitranche dominating mid-market deals.
- Default behavior: Private credit defaults stayed in low single digits through late 2024, favoring negotiated amendments over hard pulls.
- Regulatory clarity: AIFMD II now sets a defined regime for loan-originating AIFs, including leverage caps and retention for originated-and-sold loans.
Conclusion
Intercreditor terms in Europe’s mid-market are familiar, but the fine print still drives outcomes. Treat the ICA and the AAL as economic documents, not just legal ones. Map control, rescue financing priority, basket integrity, and transfers at term sheet stage. If you cannot draw a clean path to an enforceable restructuring in the jurisdictions that matter, the financing is not ready. Measure twice, sign once.