In today's economic climate, borrowers often seek financing from multiple sources to finance the start-up, acquisition and operation of their business.  Whether prior to initial loan disbursement, or months or years after the initial loans have closed, the borrower may have several creditors holding security interests in the same collateral.  Oftentimes, creditors may request an intercreditor agreement to define each party's lien priority and rights and obligations in the event of a default under any of the loans.  This article will briefly discuss the key provisions of intercreditor agreements and how SBA's regulations factor into the lender's servicing obligations regarding such agreements.

Some view intercreditor agreements as a tool for larger, more complex transactions, however, they play an important role in transactions of any size, as it impacts a lender's ability to recover in the event of a default.  Intercreditor agreements often contain many of the following elements:

• Definition of collateral for each loan.  Failure to define such collateral accurately and precisely could affect a lender's ability to foreclose on its interests in the event of a default.
• Lien Subordination.  The intercreditor agreement should be clear on lien priorities on the collateral securing each loan.
• Payment Subordination.  Oftentimes, the senior lienholder, will require that the junior lienholder turnover any payments received by the Borrower until the senior loan is satisfied in full.  
• Standstill Provisions.  The terms of this section may apply to enforcement actions against the borrower or the collateral.
• No Modification of Loan Terms.  Typically each creditor will prohibit the other from materially modifying the terms of the loan.
• Explain relative rights in the event of Bankruptcy.  Failure to delineate rights related to bankruptcy can materially affect the potential recovery on the loan.

In the context of SBA loans, an intercreditor agreement may arise in the following financing transactions:

• 504 Loans.  Where the third party lender is taking additional collateral beyond the project property, and must share lien priority, pari passu, with SBA.
• Previous Financing.  If the Borrower has existing financing in place and the creditor is willing to allow the SBA lender to obtain a lien on assets that secure the existing creditor's loan, an intercreditor agreement would be needed to set forth each parties' rights and obligations.

If the request for an intercreditor agreement arises after loan disbursement, the servicing guidelines in SOP 50 57, Chapters 6 and 8, will apply.  Specifically, SBA requires that any intercreditor agreement:

• Must not adversely impact the position of the lien securing the SBA loan.
• Contain rights and responsibilities with regard to loan servicing responsibilities, and remedies in the event of default, that are consistent with prudent lending practices.
• Must not adversely impact the ability to recover on the SBA loan. 

Intercreditor agreements are complex and can materially alter a lender's rights and liabilities.  It is essential to review any request for an intercreditor agreement with legal counsel to best protect the lender's interest and comply with SBA's guidelines.

For more information on intercreditor agreements and the requirements of SOP 50 57, please contact Jen at 267-470-1206 or jborra@starfieldsmith.com.