An intercreditor agreement is a contract among creditor groups that sets who gets paid first, who controls enforcement, and how collateral proceeds are shared. In the U.S., the agreement rests on lien priority and turnover among first and second liens. In Europe, it centers on a security agent, an Instructing Group, and a prescriptive waterfall that puts super senior revolving credit and hedging at the top.
Think of the document as the operating system for a multi-lender capital structure. It does not create security itself, but it governs priority and enforcement across facilities, notes, guarantees, and hedges so a workout can run on rails rather than on email chains and court motions.
What the Intercreditor Agreement Actually Does
The agreement’s working parts cover ranking of claims and liens, standstill and remedies, turnover, releases, consent thresholds, and transfer rules. Although drafting styles differ, the core purpose is constant: eliminate ambiguity before stress arrives.
In practice, incentives diverge. Revolvers and hedging banks want fast collateral monetization and operational continuity. Term lenders prefer measured sales to maximize recovery. Sponsors value liability management and refinancing options. Agents and trustees want clear instructions and liability protection. A good agreement acknowledges each motive and sets an orderly process that can withstand court scrutiny.
Rule of thumb: if two smart people can read a clause and honestly disagree about who controls the next step, the clause is not ready for signing.
Governing Law and Structural Building Blocks
Most U.S. agreements use New York law and run alongside Article 9 of the UCC and the Bankruptcy Code. Section 510(a) enforces subordination, and section 363(k) lets secured creditors credit bid, which supports speed and close certainty. Those statutory anchors underpin lien-based sharing and release mechanics.
Europe typically uses English law for the intercreditor agreement and the security trust. Security sits under local law documents held by a security agent. Civil-law jurisdictions often require a parallel debt so the agent is a creditor of record. EU financial collateral rules support swift share and account enforcement outside court, which materially improves timing.
Documentation Map You Can Execute Against
A well-organized stack prevents last-minute holes. Map it early, then hardwire accessions so new money does not sit outside the priority scheme.
- Intercreditor agreement: Priority, enforcement control, waterfall, turnover, and releases. Borrowers are party in most European and U.S. first-second lien deals, but not usually party to a unitranche AAL.
- Security documents: Local-law security for assets by location, held by a collateral agent or security trustee. Align with agreed security packages.
- Facilities and indentures: Define Obligations and tie into sharing and release provisions.
- Hedging and treasury: Define who benefits from security and any caps.
- Accessions: Bring new debt and hedges into the priority scheme automatically.
- U.S. side letters: Clarify lien subordination versus payment subordination and turnover.
- AAL for unitranche: Private agreement on first-out and last-out and control among lenders.
Close the loop at signing. Hardwire accessions for permitted refinancings so new money accedes on day one and sits where expected in the stack.
Priority Mechanics: Liens vs Waterfalls
U.S. first-second lien structures
In U.S. deals, the mechanic is lien subordination and turnover. Junior creditors can receive payments generally, but must remit collateral value to first liens until the first lien obligations are paid in full. Payment blockages are targeted, often for structural payment defaults, and junior interest often continues unless blocked. The waterfall is driven by lien priority and turnover, not a single trustee-run scheme.
Because the document is lien-centric, tight definitions of First Lien Obligations and Permitted Refinancing are critical. If these are loose, creative uptiering can slip through the first lien credit agreement even while the intercreditor agreement appears unchanged.
European trustee-run waterfalls
In European stacks, the waterfall is explicit. Proceeds run to costs, trustee fees, super senior revolving credit facilities, secured hedges often capped to close-out amounts, senior term debt, then junior claims. Super senior and hedges often control enforcement until discharge, which front-loads liquidity protection. Payment subordination is explicit, and junior distributions during defaults are curtailed.
Enforcement Control and Standstills
U.S. control and credit bidding
The Controlling First Lien usually directs enforcement and bankruptcy. Second lien creditors agree not to enforce or to object to a priming DIP acceptable to first liens, subject to adequate protection. Standstills for second liens run for the earlier of a fixed period, commonly 90 to 180 days, or first lien acceleration, and they continue while first liens diligently enforce. Credit bidding is central. Intercreditor agreements bind juniors to support first lien credit bids and release junior liens on sale, with turnover of proceeds.
Europe’s Instructing Group and out-of-court tools
An Instructing Group, often 66.67 percent by secured exposure, directs the security agent. Standstills are typically 90 to 120 days. If seniors do not take Material Enforcement Action, juniors may instruct. Define material enforcement to include share appropriation, a receiver appointment, or acceleration plus a sale process. Out-of-court enforcement is common. Share pledge appropriation transfers control at holdco without court oversight, so valuation mechanics and minority leakage protections must be clear.
Insolvency Interaction and Forum Realities
U.S. Chapter 11 courts generally enforce subordination, lien sharing, and turnover under section 510(a), which provides predictability. First liens usually control DIP financing. Intercreditor agreements often include a junior no objection to priming DIP and to cash collateral use with agreed adequate protection. Uptiering and priming within the first lien class occur via the credit agreement. Intercreditor agreements can curb that risk with tight definitions of First Lien Obligations, Permitted Refinancing, and lien priorities. The absolute priority rule sets outcome expectations, but drafting still drives leverage in the room.
In the UK and EU, the Restructuring Plan can cram down classes if the dissenting class is no worse off than the relevant alternative. Intercreditor agreements cannot block plan terms, but they still govern security enforcement and proceeds sharing outside court. Administration or receivership can run pre-pack or controlled sales under instruction mechanics. The Preventive Restructuring Directive has uneven implementation, so English-law intercreditor agreements and security trusts remain common for cross-border stacks.
Hedging and Revolver Positioning
U.S. approach
Secured hedges often share first lien collateral but sit behind loans in proceeds via caps or limits to bona fide exposures tied to the facilities and designated subsidiaries. Revolving credit facilities share first lien status, with control resting in the first lien majority by exposure.
European approach
Super senior revolvers and secured hedging usually sit at or near the top of the waterfall and control enforcement until discharge. Define Secured Hedge Liabilities narrowly, cap recoveries to close-out amounts, and exclude speculative trades. That precision controls leakage and improves recoveries for term lenders.
Unitranche and the AAL Overlay
In the U.S., a single credit agreement with a private AAL governs first-out, last-out economics and control among lenders. Courts generally enforce the AAL among lenders, not against the borrower or third parties. Guard against uptiering with sacred rights in both the credit agreement and the AAL. In Europe, a super senior revolver sits above the unitranche term loan under an intercreditor agreement, and an AAL then allocates priorities within the term loan. The AAL is silent to the borrower and subordinated to the intercreditor agreement. Enforcement often starts with the super senior and shifts to the unitranche last-out after standstill and super senior discharge. For deeper context, see how a unitranche sits in the capital stack.
Consent Thresholds and Amendments
U.S. norms
Majority of first lien exposure instructs. Sacred rights, such as release of all collateral, lien priority changes, and pro rata sharing changes, require all affected lenders. Drafting trends narrow open market purchase, require all affected lenders to consent to priming or subordination including via exchanges, and hardwire that new first lien debt is junior unless all first lien lenders consent.
European norms
An Instructing Group often at 66.67 percent controls enforcement, and 50 percent plus controls information and process. Ranking or release of all or substantially all collateral usually requires unanimity within the affected class. State that amendments altering waterfall or ranking without required consents are void as to non-consenters.
Release Mechanics That Hold Up
Junior liens and guarantees should release automatically on a qualifying enforcement sale or credit bid, with junior deemed consent. Agents need clear authority to sign releases and to deliver good-faith purchaser protections. Permitted refinancings must accede to the agreement on the same or worse priority, without re-papering. Those points convert theory into executable steps at sale signing.
Information Rights and Transfers
In the U.S., the first lien agent sends default notices to all parties and provides an MNPI opt-in channel for juniors. Transfer rules should restrict moves into the senior class by conflicted junior holders and manage disqualified lists without choking liquidity. In Europe, the security agent circulates default and enforcement status reports. Hedge banks often ask for equal default information. Transfers require adherence to the intercreditor agreement, no ranking uplift, and standard KYC, AML, and sanctions representations.
Enforcement Pathways and Timing
U.S. path
Typical sequencing is forbearance, acceleration, and then a 363 sale or plan, with a first lien or sponsor backstopped DIP and a credit bid. Court drives the timeline, while no contest covenants and turnover reduce fights. Article 9 foreclosure can move non-core assets, but enterprise sales usually run through Chapter 11 for free-and-clear certainty. A stalking horse bid often sets the floor and pace.
Europe path
Share pledge appropriation at holdco hands over control quickly. Planning for post-appropriation governance, revenue lockboxes, and sale options is essential. An administrator or receiver can run a pre-pack sale under intercreditor instructions and bind juniors to releases. A Restructuring Plan or Scheme can equitize senior debt and reinstate the revolver and hedges to preserve liquidity.
Tax and Accounting Touchpoints
Withholding can apply to cross-border agent fees, so tax indemnities should cover the security agent. FATCA and CRS compliance sits at the facility level, and hedge provider accessions should not add withholding or reporting friction. On accounting, the waterfall and subordination affect ECL or CECL modeling, and hedging seniority influences expected recoveries.
Risks, Edge Cases, and How to Close Gaps
- Uptiering risk: Tighten First Lien Obligations, Permitted Refinancing, and anti-subordination terms. Consider no new money, no prime.
- Drop-downs: Limit collateral releases and require migrated assets to remain within the security trust and the intercreditor agreement on any refinancing.
- Hedging leakage: Cap to bona fide exposures of the borrower group and define early termination valuation.
- Parallel debt validity: Confirm agent standing in civil-law jurisdictions.
- Standstill slippage: Define Material Enforcement Action with objective steps and dates.
- Bankruptcy resilience: State that the waterfall survives insolvency and turnover applies to distributions however realized.
- Receivables control: Confirm control perfection and cash dominion across jurisdictions.
When Each Regime Works Best
- Speed to control: Europe often wins with share pledge appropriation and receivership.
- Liquidity protection: Europe’s super senior structure is clearer for revolvers and hedging.
- Liability management: The U.S. offers more flexibility unless drafting closes gaps.
- Cross-border coordination: English-law intercreditor agreements and security trusts simplify multi-jurisdiction enforcement, while U.S. law delivers a unified forum for North American assets.
Implementation Timeline and Roles
- Weeks 0 to 2: Lock capital structure, classes, hedging eligibility, and priority. Select governing law and the expected enforcement venue.
- Weeks 2 to 4: Deliver intercreditor and security terms. Check hedging caps, revolver control, and payment block interplay with restricted payments.
- Weeks 3 to 8: Build local security, confirm parallel debt needs, and map perfection and appropriation steps.
- Weeks 4 to 8: Align definitions of Obligations, Secured Liabilities, and Permitted Refinancing across documents. Make the AAL silent to the borrower and subordinate to the intercreditor agreement.
- Weeks 8 to 10: Sign intercreditor, security, facilities, indentures, hedging, and accessions. Deliver KYC, sanctions reps, and enforceability opinions.
- Post-close: Maintain accession and release playbooks, KYC for new lenders and hedge providers, and run a mock enforcement tabletop.
Go or No-Go Tests Before Signing
- Credit bid authority: Can the senior class credit bid all or substantially all collateral and release junior liens and guarantees automatically?
- Hedge caps: Are hedging and super senior claims capped and eligible as documented?
- Turnover scope: Does turnover capture distributions however realized, including insolvency outcomes?
- Anti-priming: Are drop-downs and uptiering constrained by anti-subordination and universal-consent for priming?
- Standstill triggers: Are triggers objective and time-limited, with clear pass-over to juniors?
- Local enforcement: Can the security agent enforce in each local jurisdiction without fresh creditor joinders?
- Transfer controls: Are transfer restrictions calibrated to block conflicted buyers without choking liquidity?
Clause-by-Clause Contrasts
- Priority definitions: The U.S. pinpoints First Lien Obligations and Second Lien Obligations, including refinancings and exchanges. Europe defines Super Senior, Senior, and Hedging Liabilities with eligibility and caps.
- Enforcement control: The U.S. uses Controlling First Lien Creditors, while Europe relies on an Instructing Group and a Material Enforcement Action concept, with super senior control until discharge.
- Waterfall: The U.S. relies on lien-based turnover. Europe prescribes a trustee-run sequence, including pre and post-enforcement interest.
- Releases: The U.S. relies on deemed consent and agent authority in 363 or Article 9 sales. Europe vests broad release powers in the security agent after qualifying instructions.
- Insolvency undertakings: The U.S. adds no objection to DIP and cash collateral and limits challenges. Europe binds creditors to security agent actions and acknowledges court-led restructurings.
Negotiation Pressure Points
- RCF banks: Seek super senior status, control until discharge, and information parity. In the U.S., push for control baskets tied to cash dominion and borrowing base mechanics.
- Term lenders: Cap hedging priority and require valuation guardrails for appropriation and credit bids.
- Sponsors: Preserve flexibility for exchanges that do not improve lien ranking and keep refinancings as First Lien Obligations with clean accessions.
- Hedge providers: Insist on eligibility, caps, and early termination valuation with separate voting on hedging priority changes.
- Noteholders: Confirm information rights via the trustee and align indenture defaults with intercreditor Events of Default.
What To Do Now
- Build two playbooks: U.S. teams should emphasize section 510(a) survivability, anti-uptier terms, and DIP support. European teams should sharpen Instructing Group mechanics, appropriation, and Restructuring Plan scenarios.
- Run tabletop drills: U.S. teams should simulate a 363 sale with a credit bid and test turnover and releases. European teams should simulate share appropriation and test valuation, leakage, and governance.
- Update legacy docs: Add anti-subordination and no new money, no prime, narrow open market purchase, and align hedging caps with treasury use.
- Standardize accessions: Make accession a condition precedent to funding for all refinancings and hedges, and collect tax forms upfront.
For foundational background on how these lender priorities play out alongside sponsor capital, review this overview of an intercreditor agreement and where it sits relative to unitranche or traditional senior and second lien structures.
Recordkeeping and Retention
Archive final agreements, accessions, enforcement instructions, agent notices, and valuations with index and version control. Hash executed sets, apply stated retention periods, and obtain vendor deletion confirmations and destruction certificates when applicable. Legal holds override deletion until lifted.
Key Takeaway
The best intercreditor agreement is not just balanced on paper. It is executable in a hurry, resilient in court, and precise about who acts when. If you can credit bid on Monday, release on Tuesday, and cash-flow the business on Wednesday without calling a meeting, you have likely drafted it right.