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The key purpose of the intercreditor agreement is to ensure that each type of debt used in the transaction ranks in accordance with the parties' intended right and priority of payment. In broad terms, senior debt will rank ahead of junior debt (such as mezzanine debt), which in turn will rank ahead of debt owed to the equity investors.
In addition, the intercreditor agreement will set out the agreement of the parties in relation to certain aspects of the restructuring or enforcement process should the group get into financial difficulty (eg provisions concerning standstill periods and releases of claims). For this reason, intercreditor agreements are particularly important in Europe where there are a range of possible restructuring processes, compared with the US where the US chapter 11 process automatically provides for creditor releases and is fairly well established and predictable for creditors. For an overview of the typical parties to an intercreditor agreement, see Practice Note: Intercreditor agreement—parties and structures.
An intercreditor agreement will generally be needed where there are competing debt interests in the borrowing group and there is more than one type of secured creditor. If there is just one class of secured creditor and investor debt, a simple Deed of subordination may suffice. However, most leveraged finance transactions will
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