Chat with us, powered by LiveChat

Navigating Intercreditor Disputes In Complex Debt Restructurings

Navigating Intercreditor Disputes In Complex Debt Restructurings

Restructuring complex debt with multiple creditors can lead to intercreditor disputes that are challenging to navigate. This article provides an overview of common issues that arise and strategies for effectively managing conflicts between creditors in debt restructurings.

Understanding the Intercreditor Agreement

The intercreditor agreement establishes the rights and priorities of different classes of creditors, such as senior secured lenders, second lien holders, and unsecured bondholders, in a bankruptcy or restructuring. Key terms include:

  • Priority of liens – Who gets paid first from collateral or assets?
  • Voting rights – Who has the power to approve or block a restructuring plan?
  • Restrictions on actions – What can junior creditors do independently vs the senior creditors?

Ambiguities in the agreement can lead to disputes over interpreting creditor rights. Secured creditors may also battle each other over their priority interests in the same collateral.

Strategies for Managing Intercreditor Disputes

Seek Clarity on Rights Upfront

Before getting embroiled in disputes, the company and creditors should analyze the intercreditor agreement to understand respective rights and restrictions. Key questions include:

  • What enforcement and foreclosure rights do each creditors have?
  • Who has the power to direct key decisions in a restructuring?
  • What notice and consent rights apply for sales of assets or new debt issuances?

Table mapping out the priority rights under the intercreditor agreement can help clarify positions.

Intercreditor Priority Rights Example

Creditor Class Priority Ranking Key Rights
Senior Secured Lenders First priority lien Foreclosure on collateral, direct restructuring decisions
Second Lien Holders Junior lien Consent needed for asset sales/new debt
Unsecured Bondholders Last priority claims Influence through voting power

Communicate Openly Between Creditor Classes

Lack of transparency and posturing often exacerbates intercreditor conflicts. Maintaining an open dialogue between creditor classes through advisors can help identify win-win solutions.

The company should provide access to information and facilitate discussions to get senior and junior creditors aligned where possible. Direct engagement between creditor advisors also allows each side to better understand the other’s constraints.

Seek Consensus on Key Restructuring Decisions

Major decisions in a restructuring process often require consent from multiple creditor classes under the intercreditor agreement. For example, using collateral to support new financing or selling material assets may need approval from both senior and junior lienholders.

Where unanimous consent is needed, negotiations will be necessary to get parties on board with the proposed strategy. Identifying solutions that address senior creditors’ priority concerns while providing upside potential for junior creditors can build consensus.

Resolve Disputes Through Mediation

Litigation between classes of creditors can seriously undermine the prospects of a successful restructuring. Mediation allows the parties to work through intercreditor disputes constructively with the help of an independent mediator.

The mediator can help creditors communicate issues, identify common interests, develop options, and craft settlements. Mediation preserves creditor resources and also avoids precedents from court rulings on the intercreditor agreement that may have longer-term implications.

Seek Court Rulings as a Last Resort

When disputes between creditor classes become intractable, court intervention may be the only way forward. The court can assess the intercreditor agreement and make rulings to definitively settle fights over interpreting rights and priorities under the contract.

However, litigation is expensive and the outcomes are uncertain. Courts may also be inclined to rule narrowly on specific contract language rather than broadly considering what makes business sense for the restructuring. Going to court is usually a last resort option if negotiations and mediation fail to produce agreement.

Key Takeaways

Navigating intercreditor disputes requires understanding relative contract rights, encouraging inter-creditor communication, building consensus, and only turning to litigation when necessary. Companies and creditors should invest time upfront to analyze the intercreditor agreement and map out priorities over assets and decisions.

Keeping creditors aligned as much as possible through open dialogue preserves value and gives a complex debt restructuring the best chance of success. Independent mediation can also help settle disputes between creditor classes more quickly and cheaply than court battles. With the right advice and collaborative strategies, intercreditor conflicts can be effectively managed to facilitate negotiating a consensual restructuring plan.


Delancey Street is here for you

Our team is available always to help you. Regardless of whether you need advice, or just want to run a scenario by us. We take pride in the fact our team loves working with our clients - and truly cares about their financial and mental wellbeing.

"Super fast, and super courteous, Delancey Street is amazing"
$500,000 MCA Restructured Over 3 Years
"Thanks for helping me in literally 24 hours"
$250,000 SBA Loan Offer in Compromise
"Great choice for business owners who need a trustworthy partner"
$350,000 MCA Restructured Over 2 Years

In The Media

Delancey Street CEO discusses ways to reward employees
Delancey Street CEO discusses the benefits of franchising on Forbes.
Delancey Street CEO discusses management on AMEX.
What Should I Do If OneMain Financial Is Taking Me to Court?

What Should I Do If OneMain Financial Is Taking Me…

How to Wind Down a Small Business With Too Much Debt

  How to Wind Down a Small Business With Too…

Coping With Debt-Related Marriage or Relationship Problems

  Coping With Debt-Related Marriage or Relationship Problems Money issues…

When Starting a Small Business to Pay Off Debt is Risky

When Starting a Small Business to Pay Off Debt is…

What is Debt Settlement and How Does it Work?

What is Debt Settlement and How Does it Work? Debt…

Delancey Street simply gets it. You're talking to experts.
Steven Norris
Get Help Today

Ready To Get Started?

If you have questions, feel free to shoot us an email, or fill out our live chat.

Schedule Consultation