Another basic principle of creditor agreements is that the lead creditor generally has the right to control the maintenance and sale of joint security, while the subordinate creditor must waive certain statutory rights that would otherwise give it the right to challenge enforcement proceedings. Typically, a „standstill period” is imposed, which gives the principal creditor the exclusive right to enforce and exercise remedies against the debtor for a certain period of time. The number of standstill periods allowed during the term of the loan is usually negotiated between senior and subordinated creditors. Each standstill period is typically 90 to 180 days during the term of the loan, with additional delays extended as long as enforcement actions are carried out carefully. In order to speed up and streamline the realisation of the guarantee, the granting of exclusivity to the senior creditor may be subject to certain conditions, for example .B requirement that the senior creditor select and use the services of an independent expert qualified for the valuation of the guarantee or an experienced investment banker to conduct an auction procedure for the efficient sale of the guarantee. The same conditions may apply to the subordinated creditor if and when it resumes the process after the expiry of the standstill period for unrealized common security rights. The second secured creditor generally reserves only the right to file a claim and to demand and expedite its loans in order to maintain its status before (or at least not worse than) all unsecured claimants. Whether the second secured creditor is granted the right to accept the provision of a common security in insolvency proceedings is generally the subject of heated debate. A comprehensive agreement with creditors that sufficiently clarifies the process of enforcement of the security and the appropriate restrictions on the rights of the principal creditor is often sufficient to keep the subordinated creditor in the home. An agreement with the creditor can also protect the mezzanine lender in the event of the borrower defaulting on its loans. To this end, mezzanine lenders often lobby for protection against early seizure by the lead lender. Therefore, the mezzanine lender retains its right of seizure on the property after taking control of the borrowing company. Loans are the fuel that drives the real estate industry.
Therefore, anything that threatens the interests of lenders can have a negative impact on commercial and residential real estate. An inter-creditor agreement (IA) is a tool that lenders use to protect their rights and help maintain the flow of credit. In this article, we will discuss „What is a creditor agreement?” and look at various legal aspects of inter-creditor acts. Next, we link to an example of an inter-creditor agreement and look at the ABA inter-creditor agreement model. Finally, we examine whether an impact assessment is right for you and answer some frequently asked questions. A junior lender should apply for an exemption for a specific category of collateral that a lead lender has not included in its asset base. Once it has been agreed that there is a personal guarantee of the borrower`s capital or a guarantee in favour of the junior lender, the junior lender must ensure that the established rights are accurately reflected in the agreement with the creditor and that they do not remain motionless. In many creditor agreements, it is often the norm for the lead lender to dictate the terms of the lien.
However, in cases where a junior lender does not firmly negotiate the deed, the lead lender may disadvantage a junior lender. In some cases, a junior lender may face artificial delays from the lead lender in obtaining approval to enter into an agreement or claim. Such a decision can thwart the process and force the junior lender to surrender. Junior lenders should exercise caution when evaluating a creditor deed before signing it. One way to achieve this goal is to negotiate a fair advance and create workable plans. However, if efforts to establish such conditions are in vain, the junior lender is advised to waive the agreement or look for other options. An IA is part of a set of legal documents that mezzanine lenders typically use for multi-party financing. These are complex and highly situational agreements that lawyers draft carefully. You should have competent legal counsel to write and understand CEWs on your behalf.
All this confusion is settled by an agreement signed between the two lenders. The agreement is called the inter-creditor agreement. This will help both creditors distribute the collateral in the event of default by the borrower. The agreement thus prevents lenders from engaging in unresolved disagreements over the distribution of collateral. Such an agreement also contains provisions on redemption rights. This right allows a lender to purchase the claims and privileges of other lenders. Such an option is triggered after certain events, for example. B after the filing of an insolvency case. Before signing the agreement, the subordinated lender must also clarify the definitions of „senior debt” and „subordinated debt”. It is also common for a primary lender to process the terms of the agreement without getting approval from the junior lender.
So the junior lender should also keep an eye on it. As a general rule, such an agreement limits the payment that a borrower can make to junior lenders if the borrower defaults based on the terms set out in the agreement with junior lenders. These provisions are called „payment freezes”. This provision even limits the payments to which junior lenders are entitled in the normal course of their work from the borrower, such as interest or usual fees and expenses. The junior lender should consider including conditions for the resumption of the project in the agreement if the borrower defaults. When such a situation occurs, the junior lender should be aware that there are usually only two options available: either inject funds into the project to remedy cash shortfalls under the primary lender, or disburse the primary lender. The latter is often almost impossible in cases where the lead lender has provided very large amounts of financing. But in the event that there is a senior/junior lender, the lenders enter into a creditor agreement. Such an agreement helps them define their respective rights. The definition of privilege priority between two secured creditors is necessary if both have security rights in the same security.
The reason for this is that when performing the lien, the lead lender will try to be reimbursed first from the proceeds of the guarantee, while the junior lender expects to collect only the remaining proceeds. If the proceeds of the guarantee are not sufficient to repay the principal lender in full, secured creditors and all other unsecured creditors would be placed on an equal footing in their right to repay the remaining debts of the debtor`s other assets. The provisions on the subordination of payments in the agreement with creditors mitigate this result in favour of the principal creditor. Subordination allows the principal creditor to be paid first from all assets of the debtor or another debtor of the debtor, whether or not those assets constitute security. The amount due to the principal lender determines the conditions of subordination of the payment, not the value of the pledged guarantee. The provisions of the agreement with creditors generally require all parties to pay all proceeds of the common security to the principal creditor or its representative. In addition, it may also happen that the lead lender intentionally delays the approval of the agreement, which can be fair to the junior lender. This could prove frustrating for the junior lender.
Pari passu means „equal” in Latin. In a pari-passu agreement between creditors, each creditor receives a proportionate share of the liquidation assets of a bankrupt borrower. Note how this differs from the default subordination language of an AI. The agreement could also include restrictions on reimbursement. A subordinated lender might agree that until the senior debt is fully repaid, it will not require repayment, with the exception of interest or any other agreed payment. A senior lender will usually want a junior lender to bear the debt burden that the borrower owes. In such a case, a junior lender can protect itself by applying for exemptions for both short-term and term loans. It should also negotiate acceptance of the exercise of fundamental rights to equity, such as .
B the possession of a shareholder vote in the event of a deadlock. The agreement with the creditor plays a central role in the privilege. It is therefore crucial for both lenders to create a solid foundation in terms of rights and priorities in the event of a borrower`s financial capabilities default and default. In the absence of such a document, each party may simultaneously make its own decisions and be contradictory. The whole process can be unethical and not economic, and can quickly turn into legal chaos in court. In some cases, the borrower is also a contracting party. The borrower acknowledges the terms of the agreement, for example. B not to make a payment to the junior lender until the borrower has paid the debt in full to the senior lender. An inter-creditor agreement (or inter-creditor deed) is a contract between two other creditors. Such an agreement comes into effect when the borrower has two (or more) lenders. Lenders sign a contract between them in which all the necessary points are specified. The contract includes details such as dispute resolution, various positions of privilege, creditor responsibilities, liabilities of each creditor, impact on other creditors, etc.
Usually, a lead lender dictates the duration of the agreement. .