What is an 'intercreditor agreement'?

An intercreditor agreement is a crucial document in finance that specifically outlines the rights and priorities of different classes of creditors in relation to a borrower, particularly in situations of insolvency or restructuring. This agreement serves to clarify the hierarchy of claims, ensuring that each creditor group understands its standing and the order in which they will be paid in the event of liquidation or default. This structure helps to mitigate conflicts between creditors and provides a framework for cooperation when a company is undergoing financial difficulties.

Such agreements are particularly important in complex capital structures where multiple layers of debt exist, often including senior, subordinated, and equity holders. By clearly delineating these relationships, intercreditor agreements help facilitate smoother negotiations and decision-making processes among creditors, thereby promoting overall stability during challenging economic periods for the borrowing entity.