When things go wrong
Intercreditor dynamics in distress
status: draft
Intercreditor dynamics in distress
If you’re not the only creditor, your workout becomes a multi-party negotiation. Understanding intercreditor dynamics before distress saves time and money when it matters. The creditor with the best understanding of the intercreditor agreement often controls the process.
status: draft
Know your intercreditor agreement
Review your intercreditor agreement now if you haven’t. In distress, there’s no time to learn the document.
Key questions to answer
| Question | Why It Matters |
|---|---|
| What are your voting rights? | Determines your ability to block or force action |
| What consents do you need? | Identifies whose cooperation you require |
| What happens if lenders disagree? | Reveals dispute resolution mechanisms |
| Who controls servicer direction? | Determines operational control during workout |
| How are recoveries shared? | Affects your incentives and payoff priority |
| What are the standstill provisions? | May limit your ability to act independently |
| What are the buyout rights? | May provide path to control |
Intercreditor agreement provisions to know
| Provision | What to Look For |
|---|---|
| Payment waterfall | Order of application of collections |
| Enforcement rights | Who can direct enforcement actions |
| Blocking rights | What actions require your consent |
| Voting thresholds | Majority, supermajority, unanimous |
| Cure rights | Can junior cure senior default? |
| Purchase option | Can you buy out other tranches? |
| Release provisions | When is collateral released? |
| Standstill | Restrictions on independent action |
status: draft
Common intercreditor structures in ABF
Senior/subordinate
Senior lender has direction rights on enforcement. Subordinate lender gets paid only after senior is whole.
| Feature | Senior Position | Subordinate Position |
|---|---|---|
| Enforcement control | Full control | No independent action |
| Payment priority | First on all collections | After senior is satisfied |
| Amendment consent | May not need junior consent | May need senior consent |
| Information rights | Full | May be limited |
| Purchase right | None needed | May buy senior position |
Senior’s incentives in distress:
- Covered in most scenarios, so less urgency
- May prefer quick liquidation over long workout
- Little incentive to maximize total recovery beyond senior claim
- May agree to terms that impair junior
Subordinate’s incentives in distress:
- At risk of total loss
- Wants maximum recovery, which means longer timeline
- May want to cure senior default and step into senior’s shoes
- May want to buy senior position to control workout
Pari passu
Equal priority, typically equal voting. All lenders share equally in collateral and enforcement.
| Feature | All Lenders |
|---|---|
| Enforcement control | Majority or unanimous |
| Payment priority | Pro rata |
| Amendment consent | Per voting thresholds |
| Information rights | Equal |
Challenges in pari passu distress:
- Disagreement among lenders can paralyze decision-making
- No natural tiebreaker
- Holdout risk from minority lenders
- Unanimous consent requirements are especially problematic
First-out/last-out
Same collateral pool, but first-out gets paid first. Creates different incentives.
| Feature | First-Out | Last-Out |
|---|---|---|
| Payment priority | First on collections | After first-out satisfied |
| Enforcement control | Typically first-out directs | Limited |
| Risk position | Lower loss exposure | Higher loss exposure |
| Typical holder | Bank | Fund or alternative lender |
First-out incentives:
- May want quick liquidation once covered
- Less interested in maximizing total recovery
- May agree to sale at price that covers first-out but impairs last-out
Last-out incentives:
- Wants maximum total recovery
- May want longer workout period
- May want to buy first-out position
Mezzanine/preferred equity
Below all debt but above common equity.
| Feature | Mezzanine Position |
|---|---|
| Payment priority | After all senior debt |
| Enforcement control | Limited or none |
| Upside | Warrants or equity kickers |
| Risk | High loss exposure in distress |
Mezzanine incentives in distress:
- Most to lose from liquidation (senior is covered, equity was already impaired)
- Most to gain from successful restructuring
- May provide new money to protect position
- May try to convert to equity control
status: draft
Intercreditor conflict scenarios
Senior wants to liquidate; junior wants to extend
| Party | Position | Rationale |
|---|---|---|
| Senior | Accelerate and liquidate | Already covered; eliminate ongoing risk |
| Junior | Amend and extend | Recovery only possible if originator survives |
Resolution approaches:
- Junior cures senior default and assumes control
- Junior buys senior position at discount
- Negotiated wind-down with timeline acceptable to both
- Junior provides additional enhancement to senior in exchange for time
One lender wants to sell; others want to hold
| Issue | Complication |
|---|---|
| Drag-along rights | May require all lenders to sell if threshold met |
| Tag-along rights | May require offer to all lenders |
| Consent requirements | Sale may need majority consent |
| Different recovery views | Sellers see lower value than holders |
Resolution approaches:
- Selling lender sells only their position to new holder
- Buying party acquires all positions
- Negotiated split of collateral
Disagreement on acceptable buyer
| Issue | Complication |
|---|---|
| Relationships | One lender has conflict with potential buyer |
| Competitive concerns | Buyer is competitor of one lender |
| Credit views | Different assessment of buyer credit |
Resolution approaches:
- Competitive process with clear criteria
- Recusal of conflicted lender from decision
- Predetermined buyer qualification standards
Servicer replacement
| Issue | Complication |
|---|---|
| Different preferences | Each lender has preferred servicer |
| Control rights | Who has direction authority? |
| Cost allocation | Who pays for transfer? |
Resolution approaches:
- Intercreditor agreement should specify who directs
- Competitive selection process
- Pre-agreed backup servicer in deal documents
status: draft
Managing intercreditor relationships
Before distress: relationship building
| Action | Benefit |
|---|---|
| Know your counterparts | Understand who you’re dealing with |
| Understand their positions | Model their economics and incentives |
| Establish communication | Have direct relationships, not just through agent |
| Review intercreditor agreement together | Ensure common understanding |
During distress: active management
| Principle | Application |
|---|---|
| Communicate early | Share information as you learn it |
| Model all positions | Understand everyone’s economics |
| Propose solutions | Be constructive, not just blocking |
| Document everything | Create paper trail of all discussions |
| Coordinate with counsel | Ensure you’re protecting your rights |
Understanding each party’s economics
Model what each creditor receives under different scenarios.
Example scenario analysis:
| Scenario | Senior ($50M) | Junior ($20M) | Mezz ($10M) |
|---|---|---|---|
| Par recovery | $50M (100%) | $20M (100%) | $10M (100%) |
| Sale at 90% | $50M (100%) | $20M (100%) | $2M (20%) |
| Sale at 80% | $50M (100%) | $14M (70%) | $0 (0%) |
| Sale at 70% | $50M (100%) | $6M (30%) | $0 (0%) |
| Sale at 60% | $48M (96%) | $0 (0%) | $0 (0%) |
Incentive implications:
- Senior is indifferent between 90% and 70% recovery
- Junior’s recovery swings wildly between 80% and 70%
- Mezz is wiped out below 90%
- Each party has different break points
Buy-out strategies
If you have conviction and capital, buying out other tranches can give you control and upside.
| Buy-out Target | Benefit | Typical Pricing |
|---|---|---|
| Senior position | Control enforcement, priority | Par or slight discount |
| Junior position | Eliminate competing interest | Substantial discount |
| All other tranches | Full control | Varies by position |
Buy-out considerations:
| Factor | Analysis |
|---|---|
| Capital required | Can you fund the purchase? |
| Recovery view | Do you see more value than seller? |
| Control benefit | Does control meaningfully improve outcome? |
| Time cost | Is negotiating buy-out worth the delay? |
| Litigation risk | Will seller challenge the process later? |
status: draft
Creditor-on-creditor conflict
It happens. Lenders exercise rights against each other’s interests, engage in litigation, or take actions that benefit themselves at others’ expense.
How conflict escalates
| Stage | Characteristics |
|---|---|
| Disagreement | Different views on strategy or value |
| Impasse | Unable to reach consensus |
| Independent action | One party acts without consent |
| Formal dispute | Notice of breach of intercreditor agreement |
| Litigation | Lawsuit filed |
Protecting yourself from conflict
| Protection | Implementation |
|---|---|
| Clear documentation | Unambiguous intercreditor provisions |
| Know your blocking rights | Understand what you can prevent |
| Document positions | Create contemporaneous record of all discussions |
| Preserve rights | Don’t waive rights inadvertently |
| Engage counsel early | Legal advice before conflict escalates |
When to litigate
| Consider Litigation | Avoid Litigation |
|---|---|
| Clear breach of agreement | Ambiguous provisions |
| Material economic impact | Minor dispute |
| No negotiated solution possible | Room for compromise |
| Need to establish precedent | One-off situation |
| Other party acting in bad faith | Good faith disagreement |
Litigation costs:
- Legal fees: $100,000-$1,000,000+
- Management time: Significant distraction
- Delay: 12-36 months typically
- Relationship: Destroyed
- Recovery: Reduced by costs
Resolution without litigation
| Approach | When to Use |
|---|---|
| Negotiated compromise | Both parties can get something |
| Mediation | Need neutral facilitator |
| Expert determination | Technical dispute over valuation |
| Buy-out | One party exits |
| Consensual sale | Agree to sell to third party |
status: draft
First-mover considerations
Don’t be the last to act. The first creditor to act often controls the process.
| First-Mover Advantage | Risk of Waiting |
|---|---|
| Sets the agenda | React to others’ proposals |
| Frames the options | Options narrowed by others’ actions |
| Controls information flow | Information shared selectively |
| Establishes precedents | Bound by others’ precedents |
| Negotiates from strength | Negotiate from weakness |
When to move first
| Situation | First-Mover Action |
|---|---|
| Distress signals appearing | Contact other lenders proactively |
| Default occurring | Send default notice promptly |
| Buy-out opportunity | Make offer before others |
| Sale process | Propose terms before others |
| Servicer issues | Propose solution first |
status: draft
Intercreditor checklist for distress
Immediate actions
- Pull and review intercreditor agreement
- Identify all other creditors and their positions
- Calculate each party’s recovery under scenarios
- Identify your voting rights and blocking rights
- Contact other creditors to understand their positions
- Engage counsel familiar with intercreditor disputes
Ongoing management
- Attend all lender meetings or calls
- Document all discussions and positions
- Track proposals and counterproposals
- Model updated recovery scenarios as facts change
- Preserve all rights in writing
- Consider buy-out opportunities
status: draft
Cross-references
- Waiver, amendment, or acceleration - Decision framework with multiple creditors
- Executing a workout - Workout with multiple parties
- Enforcement and liquidation - Enforcement with intercreditor considerations
- Subordination and intercreditor agreements - Foundational intercreditor concepts