Today, we’re tackling the thrilling (yes, thrilling!) world of intercreditor deeds – the rulebook that decides which lender gets their money first when a borrower’s financial ship starts taking on water.
Think of it as the financial equivalent of boarding a plane. The senior lenders waltz through first class, mezzanine lenders shuffle into business class, and intra-group lenders and investors hope there’s space in economy. But who gets to disembark first if things go south? Buckle up, and let’s get to it.
What’s an Intercreditor Deed and Why Should You Care?
If you’ve ever lent money alongside other lenders, you’ll want to know where you stand in the pecking order. An intercreditor deed lays out the rules on:
- Who gets paid first (spoiler: not you, if you’re the mezzanine lender).
- Who can enforce security (i.e., who gets first dibs on assets if the borrower collapses).
- What payments junior creditors are allowed to pocket (hint: not many).
Without one, creditors could be squabbling like pigeons fighting over a stale croissant. With one, everyone knows their place in the financial queue.
How Intercreditor Deeds Differ from Other Agreements
Not all agreements are created equal:
- Intercreditor Deed: The all-encompassing boss of lender agreements, covering payment priority, enforcement rights, and restrictions.
- Deed of Priority: A stripped-down version, mainly focused on who gets first dibs on enforcement proceeds.
- Subordination Agreement: Makes sure junior lenders know their place and wait patiently for repayment.
The Art of Ranking Debt: Who’s First in Line?
In a leveraged finance deal, the ranking often looks like this:
- Senior lenders and hedging liabilities (these folks are practically VIPs).
- Mezzanine lenders (somewhere between first class and premium economy).
- Investor and intra-group lenders (the ones sitting in the middle seat at the back).
If there’s security involved, things get even more interesting. A “payment waterfall” ensures that whatever money is recovered flows down in strict order, with junior creditors hoping there’s something left by the time it reaches them.
The Brass Tacks: What Each Lender Can and Can’t Do
Senior Lenders
- Can enforce security first.
- Get first dibs on repayment.
- Don’t have to consult junior creditors (but it’s polite to).
Mezzanine Lenders
- Can’t enforce security unless the senior lenders are repaid.
- Can only get paid in certain circumstances.
- Might have the option to buy out senior debt if things get sticky.
Investors & Intra-Group Lenders
- Usually have to sit tight until everyone else is paid.
- Might be restricted from receiving dividends.
- Can still negotiate some leeway in repayment terms.
What Happens If the Borrower Goes Bust?
This is where things get serious. Junior creditors might be told:
- “Don’t even think about filing a claim until we’re done.” (Proof subordination.)
- “Fine, file a claim, but hand over the proceeds to us.” (Turnover subordination.)
- “Hold onto the money in trust for us.” (Trust subordination – complicated, and potentially messy if the legal system doesn’t recognise trusts.)
Senior creditors, as expected, get the lion’s share first. Junior creditors get to cross their fingers and pray for leftovers.
Security Trustees and the Power Struggle
If there’s a shared security package, a security trustee is in charge. But who gets to tell them what to do?
- Before senior lenders are repaid, they call the shots.
- After they’re paid off, mezzanine lenders might finally get a say.
That said, courts have made it clear – security trustees follow the intercreditor agreement, not some higher fiduciary calling to “do what’s fair.”
Loopholes, Negotiations, and Hidden Pitfalls
If you’re a junior creditor, you might want to push for:
- A fair market valuation clause to ensure assets aren’t sold for peanuts.
- A consultation period before enforcement action.
- A restriction on non-cash consideration (so lenders don’t settle for IOUs instead of actual money).
Senior lenders, on the other hand, often try to limit mezzanine influence and enforce control over enforcement decisions.
Special Clauses You Didn’t Know You Needed
- Marshalling Waivers: Stops junior lenders from making claims on assets senior lenders left untouched.
- Ranking Claims on Reports: Ensures due diligence claims against professionals (e.g., accountants) are ranked sensibly.
- Option to Buy Senior Debt: A lifeline for mezzanine creditors who want to take control when things go south.
- Restrictions on Debt Transfers: Stops shady lenders from sneaking in the back door and disrupting priority agreements.
The Last Word: Why This All Matters
Intercreditor deeds might not be the most exciting thing in finance, but they’re essential in leveraged transactions. They:
- Prevent chaos when things go wrong.
- Protect senior lenders while giving juniors a fighting chance.
- Ensure structured repayment and enforcement strategies.
Without them, debt financing would descend into a Wild West shootout, with creditors duelling over every last penny. Intercreditor deeds bring law and order, ensuring stability, clarity, and a fighting chance for all involved.
Disclaimer: This is for general information only. Consult your solicitor before signing anything that determines your financial fate!
