What is the difference between a subordination agreement and an Intercreditor agreement?
An intercreditor agreement is a bit different than a subordination agreement. They both serve to do the same thing, allow two different lenders to “split up” the collateral of a business so both can be secured in the first lien on their respective collateral.
What is an Intercreditor?
An Intercreditor Agreement (or inter-creditor deed) is a contract between two more creditors. Such an agreement comes into effect when the borrower has two (or more) lenders. Usually, there are two creditors in an inter-creditor agreement – one senior and the other subordinate or junior lender.
What is the purpose of an Intercreditor deed?
The principal purpose of the intercreditor agreement is to contractually regulate the relationship between the different types of creditors. Arrangements which relate to the first issue are about ‘subordination’ and arrangements which relate to the second issue are about ‘priority’.
What does subordinated in right of payment mean?
debt subordination
subordinated in right of payment means debt subordination only and not lien subordination, and accordingly, (i) unsecured indebtedness shall not be deemed to be subordinated in right of payment to secured indebtedness merely by virtue of the fact that it is unsecured, and (ii) junior liens, second liens and other …
Can you subordinate a UCC?
When a loan is secured by collateral (e.g. co-op shares) the lender files a UCC1 to let the world know it has a security interest in that collateral. The first lender could, however, agree to subordinate its security interest in favor of the second lender.
Can you subordinate a UCC lien?
Without further action, that lien technically remains a subordinate lien. Even if a conflicting secured party’s lien is subordinate to the lien of the lender, the conflicting secured party still has the legal power under the UCC to foreclose on the collateral.
How does an Intercreditor agreement work?
The Intercreditor Agreement contains a waterfall provision wherein the (i) proceeds of the ABL priority collateral are distributed first, to the ABL debt (sometimes up to a cap) and second, to the term loan debt; and (ii) the proceeds of the term loan priority collateral are distributed first, to the term loan debt ( …
Do I need an Intercreditor agreement?
An intercreditor agreement will generally be needed where there are competing debt interests in the borrower and there is more than one type of secured creditor. Intercreditor agreements are more common on certain kinds of transactions than others.
What is subordination agreement?
A subordination agreement is a legal document that establishes one debt as ranking behind another in priority for collecting repayment from a debtor. The priority of debts can become extremely important when a debtor defaults on payments or declares bankruptcy.
What is payment blockage?
A payment blockage period is a period of time during which the subordinated lender agrees that it cannot accept or retain payments from the borrower in respect of the subordinated debt.
What does UCC-3 termination mean?
A UCC-3 termination statement (a “Termination”) is a required filing that terminates a security interest that has been perfected by a UCC-1 filing. A Termination for personal property is accomplished by completing and filing form UCC-3 with the Secretary of State’s office in the appropriate state.
How does a subordination agreement work?
A subordination agreement prioritizes collateralized debts, ranking one behind another for purposes of collecting repayment from a debtor in the event of foreclosure or bankruptcy. A second-in-line creditor collects only when and if the priority creditor has been fully paid.
Is an intercreditor agreement with multiple lenders a good idea?
Secondly, getting multiple lenders to agree to an intercreditor agreement’s terms may be time consuming and difficult. Thirdly, if the borrower is delinquent on property or income taxes, the rights in the intercreditor agreement may be irrelevant, because these liens have priority over any other lien — even first liens.
What are the risks of subordination?
As a result, subordination should only be used when both parties stand to gain from the deal and the use of the first loan’s proceeds are guaranteed in writing. The biggest risk of subordinating a loan is that the buyer will default on the payments. If this occurs and isn’t remedied, the property may go to foreclosure.
Can a subordinate lienholder sue a borrower for a deficiency?
While some agreements allow a subordinate lienholder to sue the borrower for the deficient loan balance, many states don’t permit it. In addition, if the borrower is bankrupt, there won’t be anything to collect, anyway. An intercreditor agreement anticipates and attempts to remedy the problems that are presented when a borrower defaults.
What are the risks of subordinating a loan?
The biggest risk of subordinating a loan is that the buyer will default on the payments. If this occurs and isn’t remedied, the property may go to foreclosure. After foreclosure, the lien with first priority is paid first. This often results in subordinate liens being wiped out.