Pub. 4 2024 Issue 4

Subordination agreements and intercreditor agreements are often utilized to establish priority and rights when two or more lenders have liens in the same borrower’s collateral. Although these agreements are referenced interchangeably, a subordination agreement is an agreement between two or more lenders to address priority in specific liens and repayment priority, while an intercreditor agreement is an agreement between lenders to address lien priority and other rights in the event the borrower defaults on its obligations owed to a lender or files for bankruptcy. This article summarizes some of the key elements lenders should consider when negotiating subordination agreements and intercreditor agreements. Key Elements To Consider Defining the Scope of First Lender and Second Lender Obligations One of the first elements lenders should consider when negotiating subordination agreements and intercreditor agreements is the scope of the obligations of the borrower to each lender. Each lender should carefully consider how the borrower’s obligations are defined and which of those obligations also fall within the scope of the obligations owed to the other lender. If the senior obligations include amounts that a subordinate lender did not anticipate, such as increases to the senior loan amount, the subordinate lender could recover less than expected under the subordination provisions. Depending on negotiating power, subordinate lenders may consider negotiating a cap on the senior loan amount and/or a borrowing base limit applicable to the senior loan. Senior lenders, on the other hand, should seek flexibility in how its obligations are defined so that it may increase such obligations without needing the other lender’s consent should the borrower have additional financing needs. Standstill Provisions Payment Blockage Most intercreditor agreements contain standstill provisions that dictate the enforcement actions a subordinate lender can take against collateral that both lenders have a security interest in (referred to as “common collateral”) during a specified standstill period. During a standstill period, senior lenders have an opportunity to consider whether to take enforcement action against the collateral without interference from the subordinate lender. When negotiating a standstill provision, lenders will want to consider and define (i) the events that trigger a standstill period, (ii) the duration of a standstill period and (iii) what occurs after the standstill period has expired. Standstill provisions may be triggered by a borrower’s failure to make timely payments or otherwise comply with its obligations under the loan documents. Senior lenders often negotiate for the standstill period to be as long as possible, while subordinate lenders try to limit the length, especially if the value Intercreditor and Subordination Agreements LEGAL EAGLE SPOTLIGHT Key Elements Bankers Should Consider By Taylor Chase and Heather Morris, Spencer Fane LLP 12 | The Show-Me Banker Magazine

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