Mezzanine Lenders: Negotiating Intercreditor Arrangements

Here are some issues for mezzanine lenders to consider when negotiating intercreditor arrangements. We’ve found that agreeing a set of intercreditor principles up front, and as early in the process as possible, leads to transactional efficiency and a better chance of a successful execution. This list is not exhaustive and not all structures are plain vanilla. It’s much like a layered cake with the aim of getting your capital slices baked together nicely. Please feel free to contact Dom McGreal or Trish Chapman to discuss your particular requirements.

Agree a fixed limit on the priority amount of the senior debt. The parties can also agree additional headroom to give the senior lender a buffer if the senior needs to fund additional amounts.

Be able to call a mezzanine default (but not request or receive payment), so that mezzanine interest can accrue at the default rate.

Accelerate and enforce if the borrower is insolvent and the senior lender has failed to enforce within an agreed period. Or, if another kind of default occurs, a standstill (i.e. 90/120/180 days) expires.

Prove mezzanine debt and exercise other rights on insolvency if the senior lender fails to act within an agreed period.

Limit the senior’s right to block mezzanine payments to an agreed list of material defaults. Also, limit the payment blocking period (e.g. 90/120/180 days). On expiry, the senior must either enforce or waive the default giving rise to the payment block.

Have the right to purchase the senior debt at par if a senior event of default is outstanding.

Request cure rights for senior defaults, usually by injecting additional equity or additional mezzanine debt.

Agree a list of key matters in the senior terms that cannot be amended without your consent, such as pricing, payment dates, fees, financial covenants etc. and any related consents or waivers (to avoid being “dragged along” with any senior consent or waiver).

Only agree to release mezzanine security if there is a bona fide sale of the borrower’s asset for fair market value. Sale proceeds must be paid under the agreed order of priority.

Limit the persons to whom the senior lender can refinance or transfer the senior debt – and make sure that any new senior lender signs up to the current agreed intercreditor terms.

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