Written by Chiquita Woolfolk Banks, Esq.
An intercreditor agreement and a subordination agreement are both legal contracts that can be used to establish the priority of claims between multiple creditors. However, there are some key differences between the two types of agreements.
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Intercreditor Agreement
An intercreditor agreement is a contract between two or more creditors that sets out their respective rights and obligations in relation to a common borrower. The agreement may cover a range of topics, including:
- The priority of claims in the event of a default by the borrower,
- The distribution of collateral proceeds,
- Information sharing and cooperation between the creditors, and
- Dispute resolution mechanisms.
Intercreditor agreements are used to avoid disputes between creditors and ensure that all parties are treated fairly in the event of a default.
Subordination Agreement
In contrast, a subordination agreement is a contract between a creditor and a borrower or the creditor and the equity investor in the borrower; here, one party agrees to subordinate its claim to another party. This means that the subordinated party will only be repaid after the other non-subordinated party has been paid in full.
In film finance and the finance arena in general, subordination agreements are often used in situations where a borrower is unable to obtain financing from a traditional lender. For example, the equity investors in a production company may agree to subordinate its interest in order to allow the production company to obtain a loan for finishing funds from a financier. This can make the loan more attractive to the financier, as it knows that it will be repaid first in the event of a default.
Intercreditor agreements and subordination agreements are useful tools for managing the risk of multiple creditors in a film finance project. It is important to understand the difference between the two types of agreements in order to choose the right one for your specific situation.
It is also important to note that both intercreditor agreements and subordination agreements are complex legal documents. It is always advisable to seek legal advice before entering into either type of agreement.
Reach out to BANKABLE if you have a question about the use of either one of these agreements in your next financing plan!
