Intercreditor agreements are a crucial component of any structured finance transaction. These agreements govern the relationships between creditors with different priority claims on the same assets. They are designed to provide clarity and predictability with respect to each creditor`s rights and remedies in the event of a default by the borrower. One important aspect of intercreditor agreements is voting rights.
Voting rights refer to the power that each creditor has to approve certain actions that may affect the assets securing the debt. For example, in a real estate finance transaction, a borrower may need to obtain approval from its lenders before it can sell the property or take out additional loans secured by the property. The intercreditor agreement will spell out how these approvals are obtained, and what percentage of creditors must vote in favor of such actions for them to be approved.
Voting rights are particularly important with respect to junior creditors. In a typical structured finance transaction, senior creditors have priority over junior creditors in terms of repayment. Therefore, if a borrower defaults on its debt, senior creditors will be repaid before junior creditors. To protect their interests, junior creditors often negotiate for the right to veto certain actions that senior creditors may want to take. For example, a junior lender may want to prevent a senior lender from agreeing to a repayment plan that would greatly diminish the junior lender`s prospects for repayment.
The intercreditor agreement will specify how voting rights are allocated among creditors, and what actions require approval from which creditors. It will also dictate what happens in the event of a deadlock, where creditors cannot come to an agreement on a particular issue. Typically, the agreement will provide for a designated “dispute resolution” process to resolve deadlocks.
In summary, voting rights are a critical aspect of intercreditor agreements. They help ensure that each creditor`s interests are protected, and provide a clear framework for decision-making in the event of a default. If you are involved in a structured finance transaction, make sure to pay close attention to the voting rights provisions of your intercreditor agreement.