What is an intercreditor agreement and how do payment-blockage and standstill provisions affect junior creditors in a workout?
An advanced Restructuring question — expect it in final rounds and case-heavy interviews (IB, PE, Big-4 Transaction Services).
THE SHORT ANSWER
An intercreditor agreement (ICA) governs the relationship between debt classes — ranking, who controls enforcement, and how proceeds are shared. Two key levers against junior creditors: payment-blockage clauses let senior lenders stop scheduled payments to subordinated/mezzanine debt once a senior default occurs, preserving cash for seniors; and standstill provisions bar junior creditors from accelerating or enforcing for a defined period, giving seniors control of the timetable. The ICA also typically gives the senior agent the right to direct enforcement and release of security. In a workout this means juniors are often structurally muted — they can't force action and may be paid nothing until seniors are satisfied — which shapes negotiating leverage and where the fulcrum sits.
WHAT INTERVIEWERS LISTEN FOR
- ✓ICA sets ranking, enforcement control, proceeds sharing
- ✓Payment-blockage halts junior payments on senior default
- ✓Standstill bars junior acceleration/enforcement
- ✓Seniors control timetable; juniors structurally muted
COMMON MISTAKES
- ✗Confusing intercreditor with the credit agreement
- ✗Thinking juniors can freely enforce
- ✗Ignoring enforcement-control rights
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