When a business has two secured lenders, the lenders need a treaty with each other before either of them can close. That treaty is the intercreditor agreement, and it is negotiated between the lenders, over the borrower’s head, on terms the borrower rarely reads and always lives with.
What is an intercreditor agreement?
An intercreditor agreement is a contract between two or more lenders to the same borrower that sets out who gets paid first, whose lien ranks ahead, what the junior lender may and may not do on a default, and how enforcement proceeds are split. The borrower is usually a party to it but is not the one negotiating the important terms.
It does not change what you owe. It changes the order in which your creditors collect and what each of them is allowed to do about it.
Why does a second lender need one?
Because without it, a junior lender has the same enforcement rights as anyone else with a lien: it can accelerate, sue, and move on collateral independently. A senior lender advancing against a borrowing base will not accept that risk. The intercreditor is the price of admission for the junior capital, and the senior lender sets the terms.
This is why a subordinated facility that looks agreed in principle can still take weeks to close. The document that holds it up is usually not your credit agreement. It is the negotiation between two lenders who have no relationship with each other.
Payment subordination vs lien subordination
These are separate concepts and an agreement can contain either or both.
| Payment subordination | Lien subordination | |
|---|---|---|
| What it ranks | The right to receive money | The claim on collateral |
| Effect in good times | Junior payments may be blocked on default | No effect at all |
| Effect in enforcement | Senior repaid in full first | Senior’s lien satisfied from proceeds first |
| Typical use | Seller notes, mezzanine, shareholder debt | Second-lien term loans, split-collateral deals |
A second lien with no payment subordination still receives its interest every month while the loan performs. A payment-subordinated note with no lien can be blocked from receiving anything while a senior default continues. Know which one you signed.
What is a payment blockage period?
A payment blockage is a provision letting the senior lender stop scheduled payments to the junior lender after a default. It is usually limited: a defined number of blockage days in any twelve-month period, often 90 to 180, with a cap on how many blockage notices can be issued in a year.
Those limits matter more than the existence of the blockage. An uncapped blockage right is effectively permanent, and it converts a subordinated note into something closer to equity the moment the senior file goes sideways.
What is a standstill period?
A standstill is the time the junior lender must wait, after a default, before taking enforcement action of its own. During the standstill it cannot accelerate, foreclose, or sue for payment. It can usually still file proofs of claim in a bankruptcy and vote its claim.
Standstills of 90 to 180 days are common. The practical effect is that the senior lender gets first attempt at a workout, uninterrupted, with the junior lender holding a claim it cannot act on.
What else is usually in it?
- Turnover provisions. If the junior lender receives money it was not entitled to, it holds that money in trust for the senior lender and must hand it over.
- Purchase options. The junior lender may have the right, on a senior default, to buy out the senior position at par. This is real leverage and worth asking for.
- Caps on senior debt. The junior lender usually negotiates a maximum senior principal amount, so the senior facility cannot be quietly upsized ahead of it.
- Amendment limits. Restrictions on how much the senior facility can be changed, rate increased, or maturity extended without junior consent.
- Insolvency provisions. Voting, DIP financing consent, and treatment of adequate protection.
How does it affect the borrower?
Three ways that show up in ordinary operations.
First, your junior lender’s remedies are constrained, which usually works in your favour. Second, the senior debt cap can block a later increase in your working capital line if the cap was set too tight. Third, and most commonly missed: an amendment to your senior facility may require junior consent, which means a routine covenant reset now needs a third party at the table.
When should you look at the terms?
Before the term sheet stage, not at closing. The senior debt cap and the amendment restrictions are the two provisions that constrain your future flexibility, and both are negotiable while there is still competition for the mandate. Once the lenders are drafting between themselves, the borrower’s leverage is largely gone.
If you are stacking senior and subordinated capital for the first time, the ordering and pricing logic behind the layers is covered in senior, mezzanine, and unitranche, and the covenant mechanics that trigger most blockage notices are in loan covenants explained.
The short version
An intercreditor agreement is the document your two lenders negotiate about you rather than with you. The parts worth your attention are the senior debt cap, the length and frequency limits on payment blockage, and the amendment consents, because those three are the ones that will constrain a decision you have not made yet.
This is general information, not legal or financial advice. Intercreditor terms vary widely and should be reviewed by your counsel.