casemark/analyzing-intercreditor-agreements

Analyzing Intercreditor Agreements

Evaluates intercreditor and subordination provisions with lien priority, payment waterfall, and enforcement rights analysis.

When To Use

• Reviewing an intercreditor agreement (ICA) between first-lien and second-lien lenders in a leveraged financing
• Evaluating subordination mechanics in a unitranche with an Agreement Among Lenders (AAL)
• Assessing enforcement standstill periods, purchase option rights, or turnover obligations before a new deal closes
• Comparing intercreditor terms against market standards for a credit committee memo
• Analyzing split-collateral or cross-collateral structures in multi-tranche facilities

Inputs To Gather

• Intercreditor agreement or AAL — full executed document (including all exhibits and schedules)
• Related credit agreements — first-lien and second-lien (or senior/mezzanine) facility agreements to cross-reference definitions and covenants
• Collateral descriptions — security agreements, pledge agreements, and any collateral allocation schedules
• Structural diagram (if available) — organizational chart showing borrower/guarantor entities and lien attachment points
• Deal context — transaction type (LBO, recap, add-on), approximate leverage levels, and whether the ICA is being negotiated or reviewed post-execution

Workflow

1. Classify the ICA structure

   • Determine agreement type: first-lien/second-lien, senior/mezzanine, unitranche AAL, or split-collateral
   • Identify the controlling creditor class and the agent hierarchy
   • Note governing law and any jurisdiction-specific enforcement rules [VERIFY]

2. Map lien priority and collateral allocation

   • Confirm which asset categories are shared collateral vs. exclusive collateral for each tranche
   • Review lien subordination vs. payment subordination distinctions
   • Check for carve-outs (e.g., second-lien permitted to hold liens on specific asset classes)
   • Flag any "equal and ratable" provisions or springing lien mechanics

3. Analyze the payment waterfall

   • Trace the distribution hierarchy: fees → first-lien interest → first-lien principal → second-lien interest → second-lien principal → residual
   • Identify permitted payments to junior creditors (scheduled interest, excess cash flow sweeps, voluntary prepayments)
   • Locate any payment blockage triggers and their duration caps [VERIFY — typical market range is 179–365 days]
   • Assess whether the waterfall resets after a blockage period expires

4. Evaluate enforcement and standstill provisions

   • Determine the standstill period length during which junior creditors cannot exercise remedies [VERIFY — market standard varies by deal type, commonly 90–180 days]
   • Identify standstill termination triggers (acceleration by senior, insolvency filing, senior inaction for a specified period)
   • Review whether junior creditors can challenge senior enforcement actions or participate in collateral sales
   • Check for "X-clause" provisions allowing junior lenders to take enforcement action after standstill expiry even if senior has not acted

5. Review purchase option and right of first refusal

   • Confirm whether junior creditors have the right to purchase senior debt at par (or at a discount) upon an enforcement trigger
   • Note the exercise window and procedural requirements (notice periods, deposit obligations)
   • Assess whether the purchase option survives bankruptcy filing [VERIFY]

6. Assess bankruptcy and insolvency protections

   • Review DIP financing consent rights — can junior creditors object to senior-proposed DIP?
   • Evaluate adequate protection waiver scope (whether junior creditors waive rights to adequate protection on shared collateral)
   • Check voting and plan support restrictions — are junior creditors prohibited from supporting a plan that is not accepted by senior?
   • Identify "toggling" provisions that change priority upon insolvency filing

7. Flag non-standard or borrower-favorable terms

   • Incremental debt accommodation — does the ICA automatically extend to cover future incremental tranches?
   • Release provisions — can collateral be released without junior creditor consent in connection with permitted asset sales?
   • "Serta-style" uptier protections or anti-priming language [VERIFY — market adoption is evolving post-2020 litigation]
   • Amendment provisions — what voting thresholds are required to modify waterfall or lien priority terms?

Output

Produce a structured analysis report containing:

• Executive Summary — one-paragraph assessment of the ICA's key risk characteristics and whether terms are market-standard or borrower/sponsor-favorable
• Structure Overview — table identifying each creditor tranche, agent, collateral pool, and priority position
• Waterfall Diagram — step-by-step payment distribution sequence with blockage triggers noted
• Enforcement Rights Matrix — standstill periods, permitted remedies by tranche, and termination triggers in tabular format
• Key Risk Flags — numbered list of provisions that deviate from market norms or create subordination risk
• Recommendations — specific negotiation points or protective provisions to request if the ICA is under negotiation

Quality Checks

• Confirm every lien priority assertion is traceable to a specific section of the ICA — do not infer priority from deal summaries alone
• Verify that defined terms (Collateral, Obligations, Discharge) are pulled from the ICA itself, not assumed from the related credit agreement
• Cross-check payment waterfall terms against both the ICA and the underlying credit agreements for consistency
• Ensure standstill periods and blockage periods are stated with exact day counts, not approximations
• Mark any provision whose enforceability depends on state UCC law, bankruptcy code interpretation, or recent case law with [VERIFY]
• Confirm whether the analysis covers all amendments, supplements, and side letters to the ICA