Intercreditor Agreements in a Time of Tightening Credit DRAFTING, RISK MITIGATION AND DISPUTE RESOLUTION By George H. Singer, Partner, Holland & Hart LLP As credit markets tighten and capital structures grow more complex, intercreditor agreements (ICAs) have assumed an increasingly critical role in commercial finance. These agreements — defining the relative rights, priorities and risks among lenders who share a common borrower or collateral pool — can significantly influence outcomes in both performing loans and distressed scenarios. In today’s environment, where senior lenders are demanding greater protections and mezzanine or subordinate creditors are under increasing pressure, understanding the importance of issues relating to drafting, negotiating and enforcing ICAs is essential for sound credit practice and risk mitigation. This article outlines key considerations for navigating ICAs in a shifting market landscape, with a focus on drafting considerations, risk allocation, enforcement mechanisms and common sources of conflict. By appreciating the evolving dynamics between senior and subordinate lenders, bankers and legal professionals can better position themselves to mitigate risk and resolve disputes efficiently — whether at the outset of a deal or later in a scenario that involves distress. The Function and Structure of Intercreditor Agreements At their core, ICAs are contracts between two or more classes of creditors who have extended financing to the same borrower. These agreements define the relative rights, remedies and priorities among secured creditors — most often between senior and subordinated lenders — and are instrumental in managing the risks that arise from multi-tiered capital structures. A well-drafted ICA serves as a private ordering mechanism: It contractually limits the actions that junior creditors can take, thereby reducing uncertainty, curbing inter-lender litigation and promoting orderly enforcement. These agreements are particularly consequential when the borrower becomes insolvent, where the tensions due to competing interests between creditor classes are often magnified. In the context of bankruptcy, ICAs often restrict the extent to which subordinated creditors can participate in the case. These agreements typically prohibit junior creditors from contesting senior liens and debt, objecting to debtor-in-possession (DIP) financing, opposing asset sales favored by the senior lender, supporting a plan of reorganization not favored by the senior lender or even voting on a plan altogether. ICAs reflect a calculated trade-off: In exchange for predictability and reduced enforcement costs, subordinated creditors agree to cede substantial control to senior lenders, particularly in times of default. These contracts, often negotiated between sophisticated parties, streamline enforcement and reduce bargaining costs when defaults or bankruptcies occur — primarily by limiting the participation rights and remedies available to subordinated creditors. At the same time, they often give senior lenders significant control over the borrower’s fate, both in and out of bankruptcy, raising questions about fairness, leverage and strategic behavior in distressed situations.1 9 Colorado Banker
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