Below is an overview of the key terms and provisions in intercreditor/subordination agreements governing the relationship between a senior secured lender (the “Senior Lender”) and a mezzanine lender (the “Mezz Lender”). Typically, the obligations owing to the Mezz Lender (the “Mezz Obligations”) are unsecured or are secured solely by a pledge of the equity interests in the borrower and/or by a second lien security interest on the Senior Lender’s collateral (which when coupled with the payment subordination applicable to the Mezz Obligations, is frequently referred to as a “silent” second lien).

The applicability and negotiation surrounding each of the below discussed points can vary significantly based on the deal structure and the industry-specific experience and business relationships of the parties involved.

Payment Subordination and Blockage -

The Senior Lender will require that the Mezz Obligations are subordinate to the payment in full of the obligations owing to Senior Lender (the “Senior Obligations”). The typical arrangement ensures that the applicable borrower will be permitted to make regular payments of interest (and, in some cases, principal or applicable high-yield discount obligation catch-up payments, if applicable) on the Mezz Obligations and to return capital to the preferred equity holder (if applicable) so long as no payment blockage is in effect. The triggers for payment blockage and the length of payment blockage vary by deal and are subject to negotiation. A payment default under the Senior Obligations will always trigger a permanent payment blockage, but other (or any) events of default under the Senior Obligations, such as a default under financial covenants, will also effect a payment blockage that may be negotiated to a limited, specified period (usually 90-180 days)...