A Primer On Intercreditor Agreements

When structuring a complex debt financing, financiers need to consider whether unsecured and structurally subordinated "mezzanine" debt ought to be replaced in the capital hierarchy with secured second lien credit. The relatively lower financing cost for second lien credit is based on the assumption that the second lien lenders might obtain some equity value from the liens on the residual collateral which would not otherwise be available with such "mezzanine" debt. Requests for second lien status also arise when these lenders have their own credit facility and need such liens to increase their borrowing base. In exchange for such status, senior lenders often require such liens to be a "silent second" with minimal or no enforcement rights. A properly drafted intercreditor agreement among the parties to the transaction is necessary to ensure that their relative rights and obligations are enforced in a distress or bankruptcy situation.