Negotiating Intercreditor Agreements

4. What securities are subject to the subordination agreement? Agreements between creditors generally provide that the lead lender has the first right to apply all of a borrower`s collateral to the payment of the principal lender`s obligations. However, a junior lender should be careful about whether they have negotiated or received a special category of collateral that the senior lender has not included in their collateral base – such as.B. a specific insurance policy in favor of the junior lender or a personal guarantee of a borrower`s capital. If so, the agreement between creditors should indicate that the subordinated lender has the first right to that guarantee and that it is not subject to a standstill. By focusing on the issues that are most important to it and addressing them at an early stage, a subordinate creditor can ensure that it is protected in the unfortunate, though all too likely, scenario in which a senior lender wishes to exercise its rights under an inter-creditor agreement. First, payment freezes should be limited to defaults and defaults for which the lead lender has accelerated the loans. Other defaults, such as a breach of financial obligations or failure to provide the required borrower certificates, should not form the basis of a payment freeze (unless the lead lender has exercised its right to accelerate the loan). Senior lenders will oppose this position. Second, payment blocks should apply for a limited period of time – usually 90 to 180 days, depending on the type of junior capital. Third, there should be no more than one block for a particular standard. Fourthly, the total number of authorised blocks should be limited, regardless of the number of defaults.

Two blocks per year and three or four blocks during the term of the loan (depending on the term) are common. Fifth, although the junior lender assigns many rights to the lead lender in the event of bankruptcy, it should ensure that it has basic guarantees to accelerate its debt and perfect its remedies. Finally, you have to pay attention to when the payment block should start. Priority defaults should result in immediate blocking, but other defaults should not result in a freeze until the junior lender is notified. In this regard, the inter-creditor agreement should take due account of the fact that the subordinated creditor is only required to repay payments received after the applicable blocking date (i.e., in most cases, only after receipt of the notification). Although a senior lender suggests that some or all of these safeguards interfere with subordination, they are necessary to ensure that the senior lender does not assert itself on its rights to the detriment of the subordinated lender. An CIA is not limited to agreements between a single mezzanine lender and a mortgage lender. There may be piles of debt with multiple mezzanine loans – in this case, the second mezzanine lender (on the scale in the debt stack) will issue a loan to the second mezzanine borrower (the owner of the first mezzanine borrower in the pile) and the second mezzanine loan will be secured by the second mezzanine borrower`s stake in the first mezzanine borrower – and so on that "tiered" ICAs are required.

For the sake of simplicity, we have assumed in this article that there is a mortgage and a single mezzanine loan. 3. What is "junior debt" and can it be changed? To further subordinate the subordinated lender, the lead lender will emphasize that the definition of "subordinated debt" is also broad enough to include all debts owed by the borrower to the subordinated lender, whether or not they are related to the ongoing transaction. Even though this is common, the junior lender should focus on two important points specific to the transaction. First, there may be debts that should be excluded. In general, this is not the case, but there are occasions, such as . B a short-term loan or an earmarked loan, where debt should be excluded from the definition of subordinated debt. Second, where the subordinate creditor has a warrant or other capital component, the agreement between creditors should be carefully drafted in order to preserve the subordinate creditor`s power to exercise its fundamental rights as an equity investor, for example. Β voting rights as a shareholder during a period of freezing.

In addition, it is advisable to give the subordinated lender and borrower some flexibility to modify the loan or investment agreement. Changes that provide for an unlimited increase in the loan amount without the consent of the primary lender, that would make financial covenants more restrictive, change payment terms, or increase the interest rate are generally unacceptable. However, many other types of changes are approved by a senior lender, and these rights can save time and money later on. Generally, the mortgage lender`s financing of protective advances and interest deferrals are not changes that require the consent of the mezzanine lender. Often, the scope and number of these approvals can be reduced as part of a reorganization or after default events occur and persist (to cover a small handful of important concerns such as increasing the amount of loan principal, reducing the term, and providing a "kicker" to the mortgage lender). Inter-creditor agreements also often contain essentially mirror provisions that essentially grant the lead lender mirror approval rights with respect to changes to mezzanine loan documents. The inter-creditor agreement is an essential document in any real estate transaction that involves a combination of mortgage and mezzanine financing. While some degree of standardization has occurred over the years with respect to a market-standard inter-creditor arrangement between a senior mortgage lender and a subordinated mezzanine lender, these multi-issue arrangements continue to evolve and adapt to the needs of market participants and changing market conditions. The agreement between creditors plays a central role in the privilege. It is therefore crucial for both lenders to create a solid foundation for their rights and priorities in the event of a borrower`s financial capabilities failing. In the absence of such a document, each party may simultaneously make its own decisions and be contradictory. The whole process can be unethical and unprofitable, and can quickly turn into a legal mess in court.

In many creditor agreements, it is often the norm for the lead lender to dictate the terms of the lien. However, in cases where a junior lender does not negotiate the deed intensively, the lead lender may disadvantage a junior lender. In some cases, a junior lender may face artificial delays from the lead lender in obtaining approval to enter into an agreement or claim. Such a decision can thwart the process and force the junior lender to surrender. ConclusionWith COVID-19 and the resulting economic disruptions, we can expect several of these provisions to be reviewed and tested – perhaps even in court. Given the likely increase in foreclosures and adjustments, mortgage and mezzanine lenders are advised to review their AICs to understand their relative rights and obligations. These provisions and agreements are quite complex and evolving. If necessary, clients are advised to seek experienced advice, including a lawyer with a "fresh look" to review these documents. 1. When and how should planned payments to a subordinate lender be limited? Almost all institutional subordinate lenders require that the inter-creditor agreement allow for regular interest payments as long as the borrower is not in default under the senior credit agreement.

However, the lead lender requires that it have the right to introduce a lock-in or standstill period in the event of default on the senior loan documents, during which the borrower cannot make payments to a subordinated lender and a subordinated lender cannot exercise its remedies, such as. B the filing of a lawsuit, the filing of applications for involuntary bankruptcy and the forfeiture of guarantees. The junior lender can protect itself in various ways in this regard. Every junior lender should be aware of the key issues in inter-creditor agreements and the issues that are most important to the lender. The subordinated lender should focus on identifying these issues at the beginning of a transaction in order to provide a checklist of the items to be addressed in the inter-creditor agreement. Below is a summary of the most important questions and, based on current practice, answers and guidelines on each of them: Junior lenders should exercise caution when evaluating an inter-creditor deed before signing it. One way to achieve this goal is to negotiate a fair advantage and create workable plans. However, if efforts to set such conditions are in vain, the subordinate lender is advised to waive the agreement or seek other options.

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