Document available for download at the bottom of this post.
I once worked on a transaction where every item had been negotiated and all documentation was drafted and in final format, but a single number in the Subordination and Intercreditor Agreement nearly caused the entire transaction to fall apart.
A disagreement between the Subordinated Creditor and the Senior Creditor on the appropriate number of days for the Standstill Provision threatened to ruin months of work, which would have left all parties with hundreds of thousands of dollars of dead deal costs.
Up to that moment I had spent little time thinking about this document, but since that episode I always try to make sure the lenders financing a transaction are on the same page long before we are days from funding.
The purpose of this post is to briefly explain how the Subordination and Intercreditor Agreement governs the rights of the Senior Creditor and the Subordinated Creditor. There is a downloadable PDF file that includes examples of language that you might see in this document to help provide greater context. In summary, the variables to look for in this document are as follows:
There will be no negotiation surrounding subordination. The Senior Creditor will require that the Subordinated Creditor’s claims on the business are junior to the Senior Creditor until the Senior Creditor has been repaid in full.
The Subordinated Creditor will be prohibited from taking any action to enforce payments on the subordinated capital in the event that the Senior Creditor has provided a notice of default. As an example, in the event of a Senior Covenant Default, the Subordinated Creditor might have to wait 120 days before they can act (i.e. exercise remedies available in the Subordinated Note Purchase Agreement).
The Blockage Period allows the Senior Creditor to prohibit otherwise permitted payments to the Subordinated Creditor for a defined period of time. Items to take into consideration as it relates to the Blockage Period:
1. The reason for the Blockage Period should be well defined. Is this allowed in the event of a Senior Covenant Default or only in the event of a Senior Payment Default?
2. The Blockage Period should be limited to a number of days (180 days, for example).
3. The total number of Blockage Periods should be limited.
This provides the Subordinated Creditor with the option to purchase the Senior Loan.