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Understanding the Importance of Deferral of Subrogation in Intercreditor Agreements

In today's financial market, it is common to see a multi-tiered financing structure for high-value deals. Intercreditor agreements play a crucial role in such financing arrangements, as they determine the priority of the rights of different lenders in the event of a default or bankruptcy. These agreements typically involve a senior lender and one or more junior lenders. One of the critical provisions in an intercreditor agreement is the deferral of subrogation.



Deferral of subrogation is a provision that limits the senior lender's right to enforce its subrogation rights against the junior lender until the junior lender is fully repaid. Subrogation is a legal doctrine that allows a lender, who has paid off a borrower's debt, to step into the borrower's shoes and take over the borrower's rights and remedies against third parties. This means that if the senior lender has to pay off the junior lender's debt, it can take over the junior lender's rights and remedies against the borrower, such as security interests or guarantees.


However, without the deferral of subrogation provision, the senior lender could enforce its subrogation rights against the junior lender, even if the junior lender has not been fully repaid. This could result in the senior lender taking over the junior lender's rights and remedies before the junior lender has had a chance to recover its debt, thereby putting the junior lender at risk of losing its security interests and guarantees.


The deferral of subrogation provision protects the junior lender's rights and remedies until it is fully repaid, allowing the junior lender to recover its debt before the senior lender can step into its shoes. This provision ensures that the junior lender is not at risk of losing its security interests and guarantees and encourages the junior lender to continue lending to the borrower.


Furthermore, deferral of subrogation provision also protects the senior lender's interests by ensuring that the junior lender has a financial incentive to keep the borrower in good standing. If the junior lender is not fully repaid, it cannot enforce its subrogation rights against the borrower, which means that the junior lender has a financial interest in making sure that the borrower is not in default. This is because if the borrower defaults, the junior lender may not be able to recover its debt, thereby delaying the repayment of the senior lender.


In conclusion, the deferral of subrogation provision is a vital aspect of an intercreditor agreement. It protects the interests of both senior and junior lenders and encourages the junior lender to continue lending to the borrower. Without this provision, the junior lender may be at risk of losing its security interests and guarantees, and the senior lender may be at risk of delayed repayment. Therefore, it is essential for lenders to understand the importance of deferral of subrogation in intercreditor agreements and ensure that it is included in their financing arrangements.


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About the author


Sabbir Rahman is Managing Director of Langdon Capital. He has held prior roles with Morgan Stanley, Lazard and Barclays Investment Bank. He has executed over £60 billion in notional value of transactions across financing, M&A and derivatives with global corporates, private equity funds and financial sponsor groups.


About Langdon Capital


With a network of 700+ alternative investors, Langdon Capital raises debt and equity capital between £1m and £25m for high-growth and innovative companies in the technology, environmental impact and renewable energy sectors, who are preferably beyond a Series A funding round or equivalent, to help them fulfil their paths to profitability and growth ambitions.




This is not financial advice or any offer, invitation or inducement to sell or provide financial products or services or to engage in any form of investment activity.

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