October 23, 2023 - On October 17, 2023, the LSTA circulated a revised draft of the First Lien / Second Lien Intercreditor Agreement. This is one of two projects on which we are collaborating with the Commercial Finance Committee of the American Bar Association. Please find here a blacklined version which shows the changes made to the original ABA draft published about a decade ago. It is an excellent form, and our goal is merely to refresh it and incorporate know-how from those of you who have worked with it on deals.
When there are two or more secured parties with a security interest in collateral of the same borrower, the parties in the loan market will enter into an intercreditor agreement that establishes the relative priorities in that collateral. These complex instruments govern the relationship between those parties and will primarily address relative priorities in that collateral, enforcement of that collateral, any issues that may arise in a bankruptcy proceeding, the releases of collateral, as well as other ancillary matters.
In most cases intercreditor agreements effectuate lien subordination only and expressly provide that they do not create debt subordination. Lien subordination alters secured parties’ priorities with respect to collateral and collection with respect to that collateral. By contrast, debt subordination alters debtholders’ priorities with respect to payments or collection on the debt. A contract can govern both, of course, so parties drafting must be fully aware of the contours of their particular intercreditor arrangement and how they need to document them in the intercreditor agreement.
The intercreditor agreement has adapted to developments in the US loan market in recent years. Thus, revisions to the draft provide for a multi series style intercreditor agreement which is common in today’s US market. With the ability of a borrower to incur incremental debt that can be secured through a separate facility, the intercreditor documentation has had to follow suit to allow for more than one credit facility at any given priority level. Unlike a “single series” which is a bilateral agreement between two series of secured parties (typically, their agents), the “multi series” contemplates any number of series of secured debt. Multi series features include mechanics to add additional series of secured debt, typically via a joinder.
Brian Rock of Latham & Watkins LLP, is our external counsel advising us on this project. He gave an excellent presentation on intercreditor agreements earlier this year to LSTA members, and I encourage those who may be seeking a primer or refresher on this topic to view it. In addition, please find here a link to Practical Law’s note on intercreditor agreements which is also very helpful and is available on the LSTA University website. The note describes the principal characteristics of an intercreditor agreement and the issues that separate groups of first and second lien lenders must typically address where their loans are secured by shared collateral. Please send Bridget Marsh any comments on the draft by November 13th.