Importance of the Intercreditor Relationship
The relationship between the mezzanine lender and the senior lender is a key element of the successful execution of a transaction. The mechanics of the intercreditor relationship with respect to payments and the exercise of rights and remedies is documented in the intercreditor agreement.
The amount of senior debt that mezzanine lenders will agree to be subordinated is often referred to as the “debt cap”. The amount is generally specified at a maximum level on the closing date of the transaction with a “ratchet down” for ongoing debt amortization. Some forms of debt, such as a seller note or management fee to the equity sponsor, typically remain subordinated to the mezzanine debt investor.
The intercreditor agreement provides that payments on the mezzanine debt may be suspended if a payment default occurs on the designated senior debt. Additionally, if a covenant default occurs, the senior lender will have the right to send a blockage notice to the mezzanine lender which suspends payments on the mezzanine debt (typically 180 days). The mezzanine lender generally limits the senior lender to one blockage notice per 365-day period and will often limit the total number of blockage notices that can be delivered during the term of the mezzanine debt. At the end of the blockage period, the issuer may make catch up payments to the mezzanine lender if permitted under the agreement. The intercreditor agreement will typically include a turnover provision where the mezzanine lender agrees that if a payment is made to them during a blockage period, the payment must be returned or turned over to the senior lender.
Senior lenders often expect the mezzanine lender to be subject to standstill provisions that limit their ability to exercise any remedies, such as bringing suit for payment after a default or acceleration, until action is taken by the senior lender. The length of the standstill provision is also a heavily negotiated point.
F.N.B. Capital Partners (“FNBCP”) takes the relationships with its senior banking partners very seriously. FNBCP was founded within a bank holding company and has a long history working with senior lenders to understand their priorities and how to best resolve conflicts. These working relationships help to provide for smooth execution on both the front end of the deal and more importantly, during fluid ongoing circumstances that are often unpredictable.