Intercreditor agreement
LBOThe agreement between a borrower's lender groups setting how they rank against each other and who controls enforcement.
Also written: intercreditor, ICA
The intercreditor agreement is the document that decides who gets paid when a leveraged structure goes wrong. It does not create the debt or the security. It arranges the claims that already exist into an order and says what each group may and may not do.
Five things live in it. The application of enforcement proceeds, which is the waterfall itself. Payment blocks, stopping cash reaching junior creditors while the senior debt is in default. Standstill periods, preventing a junior creditor from accelerating or enforcing for a defined time. Release provisions, letting the security agent sell the business free of junior claims and guarantees so a distressed disposal can deliver clean title. And turnover, obliging any creditor who receives money out of order to hand it over.
It also names who instructs the security agent, which is where real control sits. The instructing group decides whether to enforce, when, and by what route, and a junior lender outside that group is a spectator with a claim rather than a participant in the outcome.
The general point is the one worth carrying into an interview: seniority is a contract, not a property of an instrument. Two claims over identical collateral can recover very differently because this document says so, which is why the intercreditor is negotiated at signing by people imagining the worst rather than at the moment it becomes relevant.
Worked example
Illustrative enforcement proceeds of 400 against a super senior revolver of 50, senior secured notes of 300 and a second lien of 150.
The revolver takes 50 and the notes take 300, both in full. The second lien takes the remaining 50 against a 150 claim, a recovery of about 33%.
The second lien is therefore the layer where value runs out, and its holders are the ones with a genuine interest in the valuation of the restructured business. Everything senior to it is indifferent.