Draft Intercreditor Agreement

Skill: First Lien / Second Lien Intercreditor Agreement Drafting (First-Lien Favorable)

1. Subject-matter triage

• Identify the governing debt stack, collateral package, and enforcement hierarchy before drafting any operative text.
• Determine whether the source set gives the same enforcement authority to one collateral agent or splits authority among different agents; resolve agency mechanics explicitly.
• Separate provisions that are truly settled from those needing bracketed drafting notes; do not guess on economics, lien priority, or enforcement sequencing when the sources are incomplete.
• Treat the agreement as the primary deliverable and the closing issues memo as secondary support; the draft must exist as a complete, operative file before any memo is finalized.

2. Failure modes the skill is correcting

• Drafting a standstill period without limiting recycling, which lets the first lien waive and reimpose the standstill repeatedly.
• Defining DIP capacity too broadly, so the cap effectively swallows interest, fees, or other obligations instead of staying tied to principal.
• Writing automatic lien release mechanics so broadly that a first-lien enforcement path can be used to strip junior lien value in a restructuring.
• Using an absolute waiver of adequate protection cash payments without a savings clause, creating enforceability risk.
• Omitting an all-or-nothing purchase option structure, exercise window, or correct payoff mechanics.
• Leaving amendment restrictions asymmetric or incomplete, especially on maturity, rates, collateral, commitments, maintenance covenants, and mandatory prepayments.
• Failing to preserve permitted refinancing flexibility while protecting the junior lien from a more burdensome replacement structure.
• Hiding unresolved conflicts in prose instead of flagging them with bracketed notes and a closing issues memo.

3. Legal frameworks / domain conventions that apply

• Standstill and remedies: the junior lender’s enforcement restrictions should be time-bound, subject to a recycling limit, and aligned with the source debt documents and applicable collateral enforcement mechanics.
• DIP financing: the first lien may be permitted to support debtor-in-possession financing up to a stated principal cap, with any broader formulation flagged as ambiguous and potentially overinclusive.
• Automatic release and lien subordination: release mechanics should be limited to the intended enforcement context and should not be drafted so broadly that they facilitate value-stripping transactions beyond the bargain.
• Adequate protection: any waiver of cash adequate protection should include a savings clause for enforceability and, where appropriate, preserve non-waivable statutory rights under bankruptcy law.
• Purchase option: the junior purchase right should be framed as an all-or-nothing election within a defined period, with price mechanics tied to the governing debt and payoff amounts.
• Amendment restrictions: the intercreditor should restrict both sides from amending material economics or structural protections without the required consent thresholds.
• Refinancing: replacement first-lien debt should be permitted only if it does not become materially more burdensome to the junior lien than the original first-lien package.
• Collateral priority: the agreement should address revolver/term-loan ordering, protective advances, and any priority exceptions disclosed in the source materials.
• Authority source: if the credit documents allocate collateral enforcement authority differently, the intercreditor must specify which representative acts for enforcement, release, and consent mechanics.

4. Analytical scaffolds

• Start with a clause-by-clause inventory of the source instructions and mark each point as settled, bracketed, or conflicted.
• Draft first-lien-favorable operative language, then layer in junior-protection exceptions only where the source documents or market convention require them.
• For each open point, add a bracketed drafting note that states the conflict, the proposed resolution, and the transactional consequence if left unresolved.
• When the source set admits multiple parties, tranches, time periods, or priority mechanics, enumerate the relevant variants before drafting the final clause so no category is collapsed into a generic placeholder.
• For each legal proposition embedded in the draft or memo, anchor the text to the controlling authority available from the source documents or generally recognized bankruptcy, contract, and secured-lending practice.
• Stress-test the draft for internal consistency across standstill, purchase option, automatic release, refinancing, amendment consent, and enforcement agency provisions.
• Close every identified issue with the practical consequence for the transaction and a specific drafting approach for resolution.

5. Vertical / structural / temporal relationships

• Map priority vertically: first-lien claims, junior-lien claims, protective advances, DIP support, and enforcement proceeds.
• Map enforcement temporally: notice, standstill, permitted actions during standstill, expiration, reinstatement limits, and post-default remedies.
• Map restructuring outcomes: refinancing, release, sale, foreclosure, bankruptcy, and purchase option trigger events.
• Map amendment timing: pre-closing drafting issues, post-closing consent events, and event-driven restrictions that are triggered by amendments to underlying debt documents.
• Where multiple tranches or agents exist, identify which document controls each step of the waterfall and which representative has authority to act.

6. Output structure conventions

• Produce the intercreditor agreement as the primary deliverable in complete, operative form.
• Use bracketed drafting notes for unresolved issues, including the conflict, proposed drafting path, and any fallback.
• Do not leave placeholders where operative language is available from the source set.
• Include a closing issues memo that is concise but complete, with each issue paired to a proposed resolution and practical consequence.
• If the source set contains competing formulations, preserve the first-lien-favorable choice in the draft and call out the alternative in brackets rather than silently harmonizing it.
• The memo should end with explicit recommended actions, naming the responsible party and the timing anchor for follow-up.