Intercreditor agreements should add consensus and cohesion to the bankruptcy process. They provide a framework to align creditors with often directly conflicting interests, before those interests are tested under the duress of a restructuring or liquidation. And this opportunity for pre-restructuring alignment is of greater importance given today’s active secondary loan market, which clears a path for the debtor’s original relationship lenders to sell their interests should a restructuring loom. Distressed debt purchasers, on the other hand, may have different objectives that make them less willing to join forces with longer-term holders.
The desire to avoid the destructive nature of intercreditor disputes motivated the American Bar Association to produce a model first lien/second lien intercreditor agreement in 2010 (Model ICA).1 Unfortunately, the road to a quick and easy resolution of intercreditor issues has not yet been realized. Notwithstanding the call of judges and bar associations for greater precision in their drafting, these agreements continue to suffer from a lack of clarity. Moreover, they often fail to take heed of the likely path of a restructuring.
