Structuring Sponsor Intercreditor Agreements: Negotiating Key Terms Across Lenders

Intercreditor Agreements: Priority, Control, and Protections

An intercreditor agreement is a contract that sets who gets paid first, who controls collateral, and who can act when things go wrong in a multi-lender capital structure. It aligns payment and lien priority, enforcement rights and standstills, collateral sharing and release, consent thresholds, transfer rules, and information flow. An agreement among lenders, often called an AAL, looks similar but sits only among lenders in a unitranche; the borrower does not sign it. Getting these terms right prevents value leakage in stress and makes execution faster in calm markets.

Different creditor classes want different outcomes, so the document must reconcile competing incentives. First-lien or super-senior revolvers focus on collateral liquidity, short standstills, and tight controls against priming. Junior secured lenders want time to work an outcome, the option to refinance or exchange, and a path to participate in upside. Sponsors want controlled flexibility: the ability to add capacity for acquisitions and add-ons, options for liability management that keep value in the structure, and low friction for routine corporate actions.

Governing law and common structures that drive priority

New York and English law form the backbone for leveraged intercreditor agreements. In the United States, UCC Article 9 allows subordination by agreement, and the Bankruptcy Code generally respects that bargain. In the UK and Europe, a security agent or trustee holds collateral for the group, and turnover and priority are handled contractually. Split-lien ABL and term loan structures are standard in the United States; European deals often use a single shared collateral pool with super-senior RCF payment priority.

Local rules matter, particularly in civil law jurisdictions. Some structures need parallel debt or specific security agent recognition to make shared security work. Financial assistance, corporate benefit, and upstream guarantee limits can narrow guarantor coverage and re-shape the waterfall. Map these limits early so the intercreditor fits the real collateral and the actual guarantor net.

Structure selection follows the asset base and sponsor control goals. ABL and term loan splits fit inventory-heavy businesses with fast-turning collateral. Shared collateral with a super-senior RCF works for IP-rich or services models. Holdco notes avoid intercreditor friction on operating company assets but accept structural subordination. Junior secured facilities improve recoveries but tighten intercreditor constraints. Match the stack to the asset mix, volatility, and the sponsor’s need for control.

Market shifts and what they mean for today’s documents

Private credit’s growth and the adoption of unitranche loans have moved many control terms out of public view and into bespoke AALs. Liability management trades – uptiering, dropdowns, and non-pro rata exchanges – exposed draft gaps and forced tighter sacred rights, anti-priming terms, and cleaner release mechanics in fresh paper. Do not rely on a vintage form. Fit the intercreditor or AAL to the actual lender mix, asset base, and foreseeable stress path.

One practical, fresh angle is to underwrite the stress path explicitly. Build a one-page enforcement map that sequences standstill periods, directing group handoffs, credit-bid permissions, and cash dominion switches for each collateral bucket. Then test it against two scenarios: a working capital liquidation and a going-concern 363 sale. If routing, timing, or approvals are unclear on that page, the document will fail under pressure.

Key mechanics sponsors should lock before signing

Priority of claims: Spell out the payment waterfall and lien priority. In split-lien deals, ABL proceeds from receivables and inventory pay the ABL first; term collateral proceeds from IP, equity, and real estate pay term debt first. Define residual sweeps, cash dominion, and cross-collateral triggers to avoid fights over mixed-use assets and proceeds.
Turnover and payment blockage: Require juniors to turn over any collateral proceeds they receive out of order. Define when junior cash interest and principal block: typically 90 to 180 days after a senior event of default or payment default. Permit PIK interest unless a payment default persists. In unitranche AALs, last-out interest often continues absent a payment default.
Enforcement standstill and control: Juniors agree to wait before acting on shared collateral: think 90 to 180 days for second-lien behind first-lien term, 120 to 180 for last-out behind first-out, and 60 to 90 for unsecured mezzanine behind senior secured. First-out or super-senior lenders control enforcement during and after the standstill until paid; first-lien term lenders usually control thereafter by majority-in-class. ABLs control dominion and liquidation of ABL collateral; build back-to-back blocks so working capital assets do not get swept by term lenders mid-liquidation.
Collateral sharing and release: Authorize the collateral agent to release liens and guarantees for permitted sales and credit bids. Add yank-away checks on leakage through non-pro rata exchanges, dropdowns, or transfers to unrestricted subsidiaries. Require dual-class consents for material asset releases or structurally senior debt. Cover out-of-court and in-court sales and include turnover for non-cash consideration received by juniors.
Caps and baskets: Write a precise senior debt cap that includes revolvers, letters of credit, cash management, hedging, protective advances, and incremental or accordion capacity with most favored nation where agreed. For unitranche, set junior caps to protect first-out exposure and control last-out layering through sidecars or holdco toggles.
Covenant coordination: Align restricted payment baskets, asset sale sweeps, ratio debt, and investment capacity across facilities. Require senior consent for new pari passu or senior liens, and make those thresholds hard to amend.
Information and consultation: Deliver juniors default notices, core financials, appraisals tied to ABL collateral, and DIP budgets when relevant. Keep confidentiality tight and trading safeguards clear to avoid material nonpublic information issues.
Transfers: Harmonize disqualified institution lists, competitor blocks, and limits on sales to loan-to-own funds that could flip enforcement control. Decide whether juniors can sell to seniors and vice versa, and how affiliate assignments work. Borrower buybacks and yank-a-bank mechanics should not distort class voting set in the intercreditor agreement or AAL.

Bankruptcy and DIP financing protocols that preserve value

Pre-wire debtor-in-possession financing protocols. Super-senior RCFs typically get first call to provide or assign DIP and to roll their claims; set milestones, cash collateral terms, and any section 506(c) waivers to prevent collateral value bleed. Spell out credit bidding and section 363 sale mechanics or the UK pre-pack path. In Chapter 11, courts generally honor contractual subordination and turnover; in UK plans with cross-class cram down, keep plan treatment aligned with the intercreditor agreement to avoid mismatches.

Documentation map and clean execution

Intercreditor agreement or AAL: This is the center of gravity for priority, remedies, releases, DIP, and turnover. In unitranche, the AAL sits only among lenders; the borrower acknowledges notice but does not take on obligations. For a deeper dive, see intercreditor agreements and how they allocate control.
Security documents and agent appointment: US deals often use a collateral agreement under UCC Article 9 plus property-specific documents and account control agreements. UK and European deals use a debenture and share charges under a trust. The intercreditor instructs the agent how to act across classes; define agency standards, indemnities, reliance on class instructions, and voting thresholds. Align with your security packages and guarantees.
Guarantees, joinders, side letters: Keep guarantor definitions consistent across instruments and tie guarantee releases to lien releases and asset sales. Require any new pari passu or junior secured debt to adhere to the intercreditor or AAL on incurrence. Resist side letters that insert hidden vetoes or information asymmetry.

Economics and the fee stack

The borrower pays agent and collateral agent fees, appraisal and field exam costs for ABLs, and incremental fees tied to amendments and extraordinary actions. DIP or superpriority financing may carry backstop or roll fees. Decide whether fees are class-only or shared, and apply most-favored-lender protections inside each class. Model a simple waterfall and confirm turnover works for both cash and non-cash consideration so no class over-recovers.

Accounting, tax, and regulatory notes to avoid surprises

Intercreditor agreements do not change consolidation under US GAAP or IFRS. They do affect classification and disclosure of seniority and collateral, and they influence modification accounting under ASC 470 or IFRS 9 for exchanges and tenders. Align gross-up and increased-costs clauses, withholding and treaty eligibility on transfers, and any stamp taxes. Keep sanctions, AML, and KYC clean on assignments and collection account arrangements. In court, make sure adequate protection packages and cash collateral orders meet disclosure and process rules.

Negotiation priorities for sponsors

Define collateral and proceeds precisely: Solve IP recoveries, mixed-use assets, and proceeds of inventory and receivable sales. Keep general intangibles and proceeds from getting trapped by ambiguous priority.
Set enforcement triggers and standstills: Use objective triggers. Allow juniors to act after a finite period if seniors accelerate but do not enforce or if non-cash remedies would materially impair junior recoveries.
Limit payment blocks: Confine junior cash interest and principal blocks to defined credit events, carve out fees and indemnities, cap duration and frequency, and allow PIK interest unless a payment default continues.
Control priming and incremental capacity: Set caps, MFN, pro rata offer rights, and use-of-proceeds limits for pari passu or senior capacity. Add agreed priming baskets for acquisitions and add-ons with clear size and conditions.
Align leakage controls: Synchronize restricted payment, asset sale, and investment baskets across facilities. Require dual-class consent for transfers to unrestricted subsidiaries, dropdowns, or formation of structurally senior entities.
Pre-wire DIP and credit bids: Keep the option for a junior-led DIP if seniors pass or are oversecured. Give juniors a path to participate in credit bids or receive the value of a credit bid through sale consideration and turnover.
Tighten sacred rights and voting: Make lien priority, collateral, guarantees, turnover, debt caps, DIP priming, and enforcement control sacred. Use majority-in-class for mechanics; consider disinterested votes for actions with affiliate conflicts.
Harmonize transfer regimes: Keep DQ lists consistent and limit transfers that would hand control to activist funds without a proper price.

Risks and edge cases to address upfront

Uptiering and dropdowns: Restrict discriminatory open market purchases and require dual-class consent for new priming debt or transfers of material IP, operating company equity, or receivables platforms to non-loan parties. For background, see this practical guide on intercreditor agreements and lien subordination.
Portability and toggles: If the capital structure travels on change-of-control, map how the intercreditor and AAL travel and what fees or re-openers apply. Tie guarantee and lien releases to the right closing steps to avoid jump balls.
ABL dominion: Fast-turning collateral is under ABL control. Consider measured ABL cap increases tied to appraisal updates and a term lender purchase option at par during enforcement. Calibrate this with your borrowing base and field exam cadence; a primer on ABL borrowing base mechanics can help.
Administrative complexity: Multi-agent structures need clear escalation paths, response times, and deemed consents for routine actions. Allocate agent expenses to the directing class to avoid cost disputes.

Choosing among unitranche, first or second lien, and holdco options

A unitranche with an AAL simplifies the borrower’s day-to-day, but key levers move behind closed doors among a small lender group. A classic first and second-lien stack with separate facilities is clearer and court-tested but adds amortization and covenant complexity. Split-lien ABL and term structures suit inventory-heavy businesses; super-senior RCF over shared collateral fits IP-rich or services models. Holdco notes avoid intercreditor friction on operating company assets but accept structural subordination; junior secured improves recovery but tightens intercreditor constraints. To compare trade-offs, see second lien loans and holdco PIK notes, and the US vs Europe lens on intercreditor agreements.

Implementation timeline and owners

Weeks 0 to 2: Set the capital structure, governing law, and an intercreditor or AAL term sheet with debt caps, standstills, and DIP basics. Align counsel across tranches early.
Weeks 2 to 5: Circulate drafts, map collateral and guarantors, confirm ABL borrowing base and appraisal cadence, and settle agent and trustee terms.
Weeks 4 to 6: Align cross-defaults, baskets, transfer rules, and reporting. Sync DQ lists. Annex a plain DIP and restructuring playbook where relevant.
Weeks 6 to 8: Execute the intercreditor or AAL, attach and perfect security, and deliver opinions and certificates. Complete local filings, notarizations, translations, and account control steps on funding.

Pitfalls and quick tests before you launch

Split-lien feasibility: Can you divide collateral cleanly for split-lien? If not, use shared collateral with a super-senior RCF or a conventional first and second-lien.
Legacy document limits: Do legacy documents allow a fresh intercreditor? Check negative pledges, anti-layering, and note indenture subordination. If consents are not feasible, move capacity to holdco or go unsecured.
Hard caps: Write the senior debt cap hard. Include protective advances and LC liabilities with measurement dates.
Non-pro rata exchanges: Offer pro rata rights and require dual-consent for seniority changes.
AAL separation: Keep the borrower out of the AAL. Limit any acknowledgement to notice and cooperation.
Payment blocks: Cap junior payment blocks and allow PIK absent payment default.
DIP playbook: Build a DIP regime now. Set priming consents, roll-ups, and milestones.
Release mechanics: Ensure clean releases for out-of-court and court sales with turnover for non-cash consideration.
Agent authority: Empower the security agent with clear instructions, indemnities, expense priority, and reliance on certificates and opinions.
Cross-border coverage: Audit guarantor coverage and draft to actual legal limits.

Sponsor playbook for disciplined control

Choose the control thesis: Decide who holds enforcement and priming vetoes, and at what price.
Draft precise caps: Tie any increases to acquisitions with step-downs if synergies do not arrive.
Pre-wire liability management: Keep priority intact and offer fair participation.
Calibrate timing: Fit standstills and payment blocks to asset mix and sale complexity.
Align leakage controls: Keep restricted payment, asset sale, and investment baskets synchronized across facilities.
Preserve DIP options: Keep latitude for junior-led DIPs and credit bids if seniors pass.
Rehearse enforcement: Run a mock: who instructs, when standstill ends, how proceeds flow, what releases occur, and which consents are needed.

Recordkeeping and clean closeout

Archive a complete record of intercreditor governance and actions: index, versions, Q&A, users, and full audit logs. Hash the archive, apply a retention policy, and require vendor deletion with a destruction certificate. Ensure legal holds override deletion so evidence survives in a dispute.

Closing Thoughts

Intercreditor terms decide recoveries and control when it matters most. If you fix caps, standstills, releases, turnover, and DIP protocols with precision – and test them with a simple enforcement map – you reduce disputes, preserve collateral value, and create room to execute the plan that maximizes enterprise value.

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