Whenever two lenders finance the same borrower or the same asset, someone must decide in advance who gets paid first, who controls the collateral if things go wrong and what each lender may do without the other. That contract is the intercreditor agreement. It is often the most negotiated document in a layered capital structure, and the one borrowers read least.
We focus on the top of the capital structure: first-lien, senior secured positions. We consider mezzanine only selectively, with strong control rights. That means we usually read intercreditor agreements as the senior lender, and occasionally as a junior lender insisting on the protections that make a junior position acceptable. See The capital structure and why seniority matters.
The main forms
| Structure | Document | Junior lender’s collateral |
|---|---|---|
| First lien / second lien | Intercreditor agreement | A second-priority lien on the same collateral |
| Senior mortgage / mezzanine | Intercreditor agreement (real estate) | A pledge of the equity in the property owner, not a lien on the property |
| Senior / subordinated unsecured | Subordination agreement | None, or only after the senior is repaid |
| Unitranche with first-out / last-out | Agreement among lenders (AAL) | One lien; the lenders agree among themselves who is repaid first |
| ABL revolver / term loan | Split-collateral intercreditor | Each lender is first on its own priority collateral and second on the other’s |
Two kinds of subordination
Lien subordination means the junior lender’s lien ranks behind the senior lien, so proceeds of the collateral go to the senior first. The junior is still a secured creditor and still receives payments in the ordinary course.
Payment subordination means the junior lender agrees not to receive payments, from any source, until the senior is paid, often triggered by a senior default. This is a deeper subordination and typical of subordinated notes.
Most first lien / second lien agreements subordinate liens but not payments. Mezzanine and subordinated debt often involve both.
Key provisions
Payment waterfall
Sets the order in which enforcement proceeds are applied: costs of enforcement, then senior interest and principal, then junior obligations. In a unitranche agreement among lenders, the waterfall may switch from pro rata sharing to first-out priority after a trigger.
Standstill
The junior lender agrees not to enforce its remedies for a set period after a default, commonly 90–180 days, giving the senior lender time to control the outcome. After the standstill, the junior may act, subject to the senior’s rights.
Enforcement control
The senior controls foreclosure, sales and releases of collateral. The junior usually agrees not to contest the senior’s lien or to object to a sale that the senior approves, and receives any surplus.
Cure rights
A junior lender may cure a senior default, for example by paying missed interest, for a limited number of times. This keeps the senior from accelerating while the junior decides what to do.
Purchase option
After a default, the junior may buy the senior loan at par plus accrued interest and costs. This is the junior lender’s most important protection: it can take control of the situation by paying out the senior in full. For the senior lender, the outcome is acceptable, since it is repaid.
Amendment limits
The junior typically limits the senior’s ability to increase the senior debt beyond a cap, raise pricing beyond a set amount, or extend maturity, without consent, because each of those dilutes the junior.
Bankruptcy provisions
These address debtor-in-possession financing, use of cash collateral, adequate protection, voting on a plan and the junior’s ability to bid in a sale. They are heavily negotiated because they decide outcomes in a chapter 11 case. See Enforcement and remedies.
The real estate mezzanine intercreditor
In real estate, a mezzanine lender takes a pledge of the equity in the entity that owns the property. If the borrower defaults, the mezzanine lender can foreclose on that equity by a UCC sale, often within weeks, and step into ownership of the property, subject to the senior mortgage. The intercreditor agreement typically requires that any new owner meet qualified-transferee standards, replace guarantees and cure senior defaults. Mezzanine lenders also negotiate notice of senior defaults, cure rights and a purchase option.
This is why we consider mezzanine only selectively, with strong control rights: cure rights, purchase options and consent over major decisions are what allow a junior lender to protect its capital as effectively as a senior lender would. Project Harborlight is a case study of a selective mezzanine loan.
Illustrative example
The following is illustrative arithmetic only. A property is financed with a $40M senior mortgage and a $10M mezzanine loan. Two years in, after a default, the property sells for $46M, and enforcement costs are $1M.
| Step | Amount available | Paid | Remaining |
|---|---|---|---|
| Sale proceeds | $46.0M | — | $46.0M |
| Enforcement costs | — | $1.0M | $45.0M |
| Senior principal and accrued interest | — | $41.5M | $3.5M |
| Mezzanine principal and accrued interest | — | $3.5M of $11.2M owed | $0 |
| Equity | — | $0 | — |
The senior is repaid in full; the mezzanine lender recovers about 31% of its claim. If the mezzanine lender had exercised its purchase option before the sale and held the property until a better exit, the result could have been different. That choice is exactly what the intercreditor agreement allocates.
What borrowers should know
- The intercreditor agreement is between the lenders, but it governs the borrower’s life: which lender must consent to an amendment, who can waive a default and who will be across the table in a workout.
- Borrowers are usually asked to acknowledge it and should understand it.
- Cap on senior debt and limits on amendments can restrict a borrower’s ability to refinance one layer without the other.
Questions a senior lender asks
- Is the junior debt capped, and are its maturity and amortization within the senior term?
- Is the standstill long enough to complete an orderly sale?
- Can the junior’s purchase option be exercised in a way that delays enforcement?
- Are qualified-transferee standards strict enough?
For the rest of the chapter, see the overview of loan terms and documentation. For our criteria on position, see our criteria.
This entry is general information as of November 2026, not investment, legal or tax advice, and not an offer of securities.