As we live in an economy where businesses borrow money from multiple banks, intercreditor agreement plays a crucial role in ensuring all the parties involved are on the same page. The intercreditor agreement is a legal document between two or more banks that determines their respective rights and obligations regarding a borrower`s assets and liabilities. This agreement helps in resolving any conflicts that may arise regarding the repayment of the debt.
The intercreditor agreement sets out the hierarchy of the lenders` claims on the borrower`s assets and the order in which they will be repaid. It also determines the conditions surrounding the distribution of any proceeds from the sale of assets, including collateral. This ensures that the lending banks are protected and can work together in case of a default.
The intercreditor agreement typically outlines the rights and obligations of the senior and junior lenders. Senior lenders have the primary right to receive payment in the event of a default by the borrower, while junior lenders are subordinate and only receive payment once the senior lenders have been paid in full. This arrangement creates a risk-return trade-off between the different lenders. Senior lenders typically receive a lower rate of interest but are secured against the borrower`s assets. Junior lenders receive a higher rate of interest but take on more risk.
The intercreditor agreement also deals with issues such as the use of cash flow and the transfer of assets between the borrower and the lenders. This agreement prevents the borrower from circumventing the senior lender`s position by transferring assets to the junior lender. Additionally, it ensures that the lenders have an equal say in any restructuring or refinancing plans that the borrower may undertake.
In conclusion, an intercreditor agreement between banks is a crucial document that sets out the rights and obligations of the lenders. It helps in resolving any potential conflicts and ensures that all parties involved work towards the common goal of repaying the debt. This agreement helps in managing risk and creates a structure that benefits both the borrower and the lenders. As such, it is crucial for any business looking to borrow money from multiple banks to have an intercreditor agreement in place.