In some cases, the borrower is also a contracting party. The borrower acknowledges the terms of the agreement, for example. B not to make a payment to the junior lender until the borrower has paid the debt in full to the senior lender. You will find most of the following documents associated with a creditor agreement for a mezzanine loan. An inter-creditor deed makes sense when two or more facilities lend money to a borrower. It is in everyone`s interest to clarify the relationship between lenders in the event of default by the borrower. Assets America® may arrange commercial financing involving inter-creditor acts. We can arrange financing from a minimum of $5 million for borrowers looking for senior and/or subordinated loans. However, we prefer loans starting at $20 million and above. In general, in any document signed by two or more parties, each party must be aware of the critical elements of the agreement. Therefore, it is necessary for a junior lender to find clear ground before starting the transaction and identify the fundamental issues as follows: A creditor agreement can also protect the mezzanine lender in the event of the borrower defaulting on its loans. To this end, mezzanine lenders often lobby for protection against early seizure by the lead lender.
Therefore, the mezzanine lender retains its right of seizure on the property after taking control of the borrowing company. An inter-creditor agreement (or inter-creditor deed) is a contract between two other creditors. Such an agreement comes into effect when the borrower has two (or more) lenders. Lenders sign a contract between them in which all the necessary points are specified. The contract includes details such as dispute resolution, various positions of lien, responsibilities of creditors, liabilities of each creditor, impact on other creditors, etc. Inter-creditor agreements (aka inter-creditor acts) can become quite complex. In this section, we will look at some legal aspects of creditor acts. In many creditor agreements, it is often the norm for the lead lender to dictate the terms of the lien. However, in cases where a junior lender does not firmly negotiate the deed, the lead lender may disadvantage a junior lender. In some cases, a junior lender may face artificial delays from the lead lender in obtaining approval to enter into an agreement or claim.
Such a decision can thwart the process and force the junior lender to surrender. In many cases, an agreement with the creditor ensures that the lead lender fully compensates for its losses plus interest before the junior lender can begin to receive its share of the proceeds from the sale of a property. However, this is determined by the exact nature of the subordination agreement between the two parties. Pari passu means “equal” in Latin. In a pari-passu agreement between creditors, each creditor receives a proportionate share of the liquidation assets of a bankrupt borrower. Note how this differs from the default subordination language of an AI. Agreements between creditors focus on the rights and obligations of senior lenders and mezzanine lenders, not borrowers. However, agreements reached by these parties can have a significant impact on borrowers` bottom line, especially in the event of default.
For example, a longer standstill clause could give a borrower more time to update their loan, which could allow them to correct their default before their mezzanine lender has taken control of the borrowing company. For this reason, borrowers should always carefully read agreements with creditors if possible. In addition, they should usually seek the advice of an experienced real estate lawyer or consultant to ensure that the agreement does not contain unreasonable or unfair provisions. However, in some cases, there are more than two lenders. Or even more than two older lenders. In this case, the lead creditors sign a separate agreement setting out the powers of each individual. In most cases, if a borrower defaults on a mezzanine loan, the mezzanine lender will take over the ownership company from the original borrower (and thus take over the property for itself) and continue to make payments to the lead lender. However, a mezzanine lender could theoretically take over the owner company and instead of making payments, it could file for bankruptcy to offset its losses more quickly. However, this could potentially cut off the lead lender from its portion of the property, or at least tie up the property in lawsuits that could take months or even years.
For this reason, many agreements with creditors prevent the subordinated lender from taking control of a borrowing company and filing for bankruptcy. The definition of privilege priority between two secured creditors is necessary if both have security rights in the same security. The reason for this is that when performing the lien, the lead lender will try to be reimbursed first from the proceeds of the guarantee, while the junior lender expects to collect only the remaining proceeds. If the proceeds of the guarantee are not sufficient to repay the principal lender in full, secured creditors and all other unsecured creditors would be placed on an equal footing in their right to repay the remaining debts of the debtor`s other assets. The provisions on the subordination of payments in the agreement with creditors mitigate this result in favour of the principal creditor. Subordination allows the principal creditor to be paid first from all assets of the debtor or another debtor of the debtor, whether or not those assets constitute security. The amount due to the principal lender determines the conditions of subordination of the payment, not the value of the pledged guarantee. The provisions of the agreement with creditors generally require all parties to pay all proceeds of the common security to the principal creditor or its representative. Typically, in an agreement with creditors, there are two creditors – one first and the other subordinated or subordinated lender.
For example, Company A takes out a loan from Bank A for a large project. Later, Company A also took out a relatively smaller loan from Bank B for the further expansion of the same project. In this case, Bank A is the primary lender and Bank B is the junior lender. A senior debt loan agreement includes sensitive issues such as interest charges, costs, and offsetting payments that give preference to the primary lender over junior lenders. .