of the collateral may decline during such period. After a standstill period expires, the subordinate lender can then exercise its rights against the collateral under the terms of the subordination and intercreditor agreement. Payment Blockage Payment blockage provisions are another key element lenders should consider when entering into subordination and intercreditor agreements. These provisions allow a senior lender to block payments to a subordinate lender under certain conditions, usually when there is a default on the senior lender’s debt. Payment blockage provisions generally require that a borrower’s available funds are used to satisfy senior debt obligations before payments are made to subordinate lenders. The parties should clearly outline the specific conditions triggering a payment blockage, the duration of the blockage period, any exceptions to the payment blockage, and whether missed payments to the subordinate creditor can be made after the triggering condition has been cleared. Amendment Restrictions Amendment restrictions within subordination and intercreditor agreements govern the ability of the borrower and lenders to amend the terms of the underlying credit facility. Typically, subordination and intercreditor agreements provide that material amendments to the senior facility, such as increasing the principal amount beyond any applicable cap, increasing the interest rate, increasing fees owed to the senior lender, and maturity date extensions require the consent of the subordinate lender. These provisions protect subordinate lenders from unexpected changes that could negatively affect their ability to collect debt payments or collateral proceeds in the event of a default. BANCMAC COMMUNITY BANC MORTGAGE CORP. YOUR COMMUNITY BANK MORTGAGE PARTNER bancmac.com mortgages@bancmac.com 888.821.7729 | NMLS# 571147 BancMac provides correspondent and wholesale lending and is your Community Bank Mortgage Partner to help your financial institution originate fixed-rate secondary market loans including: PROGRAMS • Conventional Loans • USDA Rural Development Loans • Rural Living (Hobby Farm) Loans • VA Loans • Jumbo Loans • FHA Loans OUR PARTNERS RECEIVE: • Superior Service & Competitive Pricing • No Minimum Volumes • Significant, Non-Interest Fee Income • Non-Solicit Protections & More Conclusion Subordination and intercreditor agreements are essential tools used in financing transactions involving multiple lenders to facilitate and manage each lender’s rights and expectations with respect to security interests and the borrower’s payment obligations. By understanding key elements, including the scope of the senior and subordinate obligations, payment blockage provisions, standstill provisions and amendment restrictions, lenders are better positioned to effectively protect their interests and navigate the complexities of subordination and intercreditor agreements, particularly in the event of a borrower default or bankruptcy filing. Taylor Chase and Heather Morris are members of the Spencer Fane Banking and Financial Services team. They can be reached at tchase@spencerfane.com or (816) 292-8801 and hmorris@spencerfane.com or (816) 292-8387, respectively. The Show-Me Banker Magazine | 13
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