When it comes to financing, subordination agreements and intercreditor agreements are two legal documents that are often confused with each other. These agreements are essential in many finance transactions as they set out the relationship and priority of creditors in case of default or bankruptcy. But what is the difference between a subordination agreement and an intercreditor agreement? Let’s dive into the details.
Subordination Agreement
A subordination agreement is a legal document that establishes the priority of debt in case of default, bankruptcy or insolvency. This agreement is typically used in situations where a borrower has several creditors, and one creditor has a higher priority to be paid back before others. For instance, a subordination agreement can be used in a real estate transaction where the property owner has secured a mortgage from two different lenders.
In this case, the subordination agreement allows the second lender to take a secondary position on the property, thus making the first lender a higher priority. This means that if the borrower defaults, the first lender gets paid back before the second lender. Therefore, the subordination agreement outlines the terms and priorities of each lender`s debt, thus minimizing the risk of default and protecting both lenders’ interests.
Intercreditor Agreement
An intercreditor agreement is a legal document between two or more lenders who have a shared interest in a borrower’s assets. This agreement outlines the rights and priorities of each lender in case of default, bankruptcy, or insolvency. Unlike the subordination agreement, an intercreditor agreement is used when multiple lenders have an interest in the same assets or collateral.
For example, in a corporate leveraged buyout, multiple lenders may provide funding to the borrower. The intercreditor agreement sets out the priorities of each lender regarding the borrower’s assets and payments. This ensures that each lender is aware of their role and rights in case of any insolvency or default.
Key Differences
The primary difference between a subordination agreement and an intercreditor agreement is that the former deals with the priority of debt between creditors, while the latter outlines the rights and priorities of the lenders in a borrower`s assets. A subordination agreement is often used to establish a hierarchy of debt, while an intercreditor agreement is used where multiple lenders have an interest in the same assets.
Conclusion
In conclusion, subordination agreements and intercreditor agreements are essential documents in finance transactions, but they serve different purposes. A subordination agreement establishes the priority of debt between creditors, while an intercreditor agreement outlines the rights and priorities of lenders in a borrower`s assets. Therefore, it`s vital to understand the differences between these two agreements to make informed decisions when financing or borrowing.