Of all the documents utilized in a secured transaction, intercreditor agreements are often the most heavily negotiated and the most precisely drafted. While the majority of the other documents are fairly predictable in construction, the structure of an intercreditor agreement will depend largely upon the relative bargaining power of the lenders or lender groups, the nature of the collateral, and the particular interests involved. As a result, intercreditor agreements should be approached carefully by even the most experienced transactional attorney. This article will present an overview of the purpose, structure and issues regarding intercreditor agreements.
An intercreditor agreement in a secured transaction is essentially an arrangement among creditors to have a collateral agent act on their behalf to obtain security interests in and to manage the collateral supporting their loans and, if necessary, to enforce the collateral and divide the proceeds thereof as agreed. Intercreditor agreements are invariably made complicated by loans of different sizes, various types of collateral involved, and intense negotiations among lenders as to their rights in different situations, especially defaults. These agreements also address other eventualities, such as the sale, destruction, loss or replacement of collateral and the consequences thereof.
