What is the difference between an intercreditor agreement and a subordination agreement?

A subordination agreement ranks one debt behind another. An intercreditor agreement usually contains that ranking and also regulates how the lenders behave: when the junior lender may be paid, how long it must wait before enforcing, who controls a sale and what each may change without the other. A shareholder's loan is often dealt with by a short deed of subordination, while a mezzanine or second-lien loan usually calls for the fuller document.

What is a standstill period?

It is a stated time, after a default, during which the junior lender agrees not to enforce its debt or security. The purpose is to give the senior lender the first chance to decide what happens without a competing enforcement. Periods are negotiated and commonly vary with the kind of default. The agreement also says what ends a standstill early, for example if the senior lenders themselves begin enforcing, or an insolvency process starts.

Can a mezzanine lender block the sale of a business?

It depends on the release clause. If the agreement allows the security trustee or senior lenders to release the junior lender's security on an enforcement sale, usually on conditions about price or process, the mezzanine lender cannot stop the sale merely by withholding a signature. If the clause is missing or its conditions are not met, the answer turns on how the sale is made. A secured party's own enforcement sale can clear lower-ranking security in some markets, but a share sale does not, and a buyer will want anything left released, which gives that lender real bargaining power.

Is the borrower a party to an intercreditor agreement?

Usually yes, together with the lenders, any hedging banks and often the group companies giving security and guarantees. The borrower's signature matters because the agreement restricts what it may pay to the junior lender and sets out how its assets may be sold. It has limited rights under the document, and the commercial balance is struck mainly between the lenders. Its advisers should still read it, since it will shape any later refinancing.

// WORKED EXAMPLEHOW THE DOCUMENT WORKS

Intercreditor Agreement: How Two Lenders Divide Control

The ranking is the easy part. The argument is about control.

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-09 · 7 MIN READ

// THE SHORT ANSWER

An intercreditor agreement answers a question a facility letter cannot: when two lenders want different things from the same struggling business, whose decision prevails? It ranks their claims, but its real work lies in what the junior lender agrees not to do: take payments the senior lender has stopped, enforce during a standstill, or hold out against a sale. In exchange the junior lender commonly gets limits on how far the senior debt can grow, a right to buy the senior lender out and a defined share of the proceeds. Lenders read it for control at least as much as for ranking.

BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

// MAKE THE CALL

Issue 03 — Kauri Dairy Holdings. The patriarch is retiring. The bank hears about the succession plan from the accountant first. Your call first, then the senior banker's.

Read the file →

PART OF What Your Bank Holds as Security

// 01 — WHY ONE CASH FLOW NEEDS ONE RULEBOOK

A bank and a second lender agree while the business is healthy and disagree when it is not. The bank wants its money back, and a sale that clears its debt is a good sale. The fund, mezzanine lender or vendor behind it is repaid only from value above the senior debt, so it wants time, a higher price or a chance to take control. Each has its own facility letter, and neither letter binds the other lender.

Without an agreement, the law supplies only part of an answer. In New Zealand and Australia the personal property securities Acts rank registered interests, and in the UK priority follows the rules on charges. None of them says who may enforce first or whether the junior lender may keep collecting interest once the business is in default, and they leave gaps on how a buyer gets clean title. Those are the matters an intercreditor agreement exists to settle.

// 02 — THE CLAUSES THAT DO THE WORK

Ranking who is paid first, from which assets

Permitted payments what the junior lender may receive meanwhile

Payment stop senior notice suspends those payments

Standstill junior may not enforce for a stated period

Turnover money received out of turn is handed over

Release junior security falls away on an enforcement sale

Senior cap how much senior debt keeps its first ranking

Amendment limits what either side may change without the other

Buy-out option junior may purchase the senior debt

Each of these is negotiated. Standstill periods commonly differ by the type of default, with the shortest for a missed payment. A payment stop is usually limited in length and in how often it can be used. A release clause often comes with conditions meant to show the sale was fair, such as a cash price, a competitive process or an independent opinion. Where the lenders share one package of security, a security trustee commonly holds it and acts on the instructions the agreement specifies. The Loan Market Association publishes recommended forms for leveraged deals, generally to its members, and these are a starting point. Smaller deals often use something shorter.

The legal footing for ranking by agreement is explicit in New Zealand (section 70 of its Personal Property Securities Act) and Australia (section 61 of its Act). In the UK it rests on contract and on courts holding creditors to subordination bargains.

// 03 — THE EXAMPLE

A chain of indoor climbing gyms, constructed for this page like every figure in it, owes a bank US$30.0m of senior debt and a private fund US$10.0m of mezzanine debt. The fund's loan pays 6% a year in cash, quarterly, and adds another 6% to its balance. Their intercreditor agreement caps senior debt at US$33.0m and sets a 120-day standstill for a covenant default. These terms are the example's and are not offered as a market norm.

Day 0 Leverage covenant breached. Bank serves a payment stop.

Fund gives notice of default; its standstill starts.

Day 30 Fund weighs buying the senior debt. It declines.

Day 90 Quarterly cash interest of 0.15 is not paid.

Day 120 Standstill ends. Bank has started enforcement and is

running a sale; the agreement bars competing enforcement.

Day 180 Second 0.15 not paid. Sale completes.

Sale price, cash, after an auction 34.00

Costs of sale −1.00

Net proceeds 33.00

Senior debt, interest and enforcement costs −30.60

Left for the fund 2.40

Fund's claim: 10.00 + 0.30 unpaid + 0.30 added 10.60

Fund's shortfall 8.20

Each clause did something the ranking alone would not have. The payment stop kept US$0.30m in the business while it was being sold. Had an interest payment reached the fund by mistake after the notice, turnover would have sent it to the bank. The standstill gave the bank four months without a rival enforcement. The release let the buyer take the gyms free of the fund's charge.

That last clause carries the most value. The fund's charge was worth US$2.40m on the waterfall. A sale of shares in the operating companies, or any sale that does not clear lower-ranking security by law, would have left the buyer needing the fund's signature, and a lender whose signature is needed can ask to be paid for it. The fund's protections worked too. The bank's claim sat within the cap, the auction gave it evidence of price, and it had a month in which it could have bought out the bank and taken control of the outcome.

// 04 — HOW IT DIFFERS FROM A DEED OF PRIORITY

A deed of priority settles who ranks first over shared security, usually up to a capped sum, and in many cases leaves each lender free to act. It suits a bank and a finance company that have each lent against assets and do not expect to run a restructuring together. An intercreditor agreement goes on to govern conduct: payments, enforcement, releases, amendments and transfers. In New Zealand and Australian mid-market deals the two labels can overlap, so a reader looks at what the document does rather than what it is called.

Subordination by an owner is narrower still, because an owner is rarely expected to do anything except wait. A second-lien or mezzanine loan is what usually brings a full agreement into being, since it puts an active, return-seeking lender behind the bank.

DEFINED IN ONE PARAGRAPH → · SECOND-LIEN LOAN → · SECURITY TRUSTEE →

// 05 — WHERE IT DECIDES A FILE

A senior credit reader asks how the agreement behaves in the first bad quarter. Can the junior lender demand repayment? How long is the standstill, and what ends it early? Is the payment stop automatic on a payment default or does it need a notice? Does the senior cap leave room for rescue money, and do interest, hedging and enforcement costs sit inside it? A cap set exactly at today's debt can leave a bank funding a turnaround from behind.

A junior reader asks the mirror questions: what can the senior lender do to its position without consent, such as raising the margin or extending maturity, and what must a release sale look like. Both read the transfer clause, because a position bought by a distressed-debt fund can behave very differently from the lender that signed. The borrower signs too, and is bound. A later refinancing of either lender usually needs the agreement dealt with first, which makes it part of any exit plan.

BANK LOAN VS PRIVATE CREDIT → · CORPORATE LENDING AND CREDIT RISK → · WHEN A LOAN GOES BAD →

// SOURCES

The documents the statements on this page rest on. Each was opened and checked when cited.

Federal Register of Legislation (Australia), Personal Property Securities Act 2009, section 61 (compilation as at 14 October 2024) — A secured party may subordinate its security interest; the subordination is effective according to its terms and can be enforced by an intended third-party beneficiary — section 02.

// QUESTIONS PEOPLE ASK

What is the difference between an intercreditor agreement and a subordination agreement?: A subordination agreement ranks one debt behind another. An intercreditor agreement usually contains that ranking and also regulates how the lenders behave: when the junior lender may be paid, how long it must wait before enforcing, who controls a sale and what each may change without the other. A shareholder's loan is often dealt with by a short deed of subordination, while a mezzanine or second-lien loan usually calls for the fuller document.
What is a standstill period?: It is a stated time, after a default, during which the junior lender agrees not to enforce its debt or security. The purpose is to give the senior lender the first chance to decide what happens without a competing enforcement. Periods are negotiated and commonly vary with the kind of default. The agreement also says what ends a standstill early, for example if the senior lenders themselves begin enforcing, or an insolvency process starts.
Can a mezzanine lender block the sale of a business?: It depends on the release clause. If the agreement allows the security trustee or senior lenders to release the junior lender's security on an enforcement sale, usually on conditions about price or process, the mezzanine lender cannot stop the sale merely by withholding a signature. If the clause is missing or its conditions are not met, the answer turns on how the sale is made. A secured party's own enforcement sale can clear lower-ranking security in some markets, but a share sale does not, and a buyer will want anything left released, which gives that lender real bargaining power.
Is the borrower a party to an intercreditor agreement?: Usually yes, together with the lenders, any hedging banks and often the group companies giving security and guarantees. The borrower's signature matters because the agreement restricts what it may pay to the junior lender and sets out how its assets may be sold. It has limited rights under the document, and the commercial balance is struck mainly between the lenders. Its advisers should still read it, since it will shape any later refinancing.

// NEXT TO IT

// ON WHOSE DESK

The seats that read this term in an ordinary week. Each page says what the seat is for, who arrives in it, and the shape of the round it runs.

Credit sanctionerHolds delegated authority and signs — or declines — the lending the front line brings.
Legal counselAdvises the bank on what it can do, drafts and negotiates what it signs, and manages what goes wrong.
Lending operations officerTurns an approval into a working facility — documentation, security, drawdown, and the register that says what the bank actually holds.

THE IN-TRAY · ONE MINUTE

Make the call on one file.

A short file on the ground this page covers. Every option opens with how far it sits from a senior banker’s read.

THE FIRST QUESTION · THE LOAN · PROTECTION

A term sheet offers three protections: a negative pledge, a quarterly leverage covenant, and monthly management accounts.

Which is likely to show deterioration first?

7 MORE ON THE LOAN · PROTECTION →WHERE DO YOU READ FROM? THE PLACEMENT →

THE READING ROOMIN ONE PARAGRAPHIntercreditor agreement What is an intercreditor agreement?