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Understanding the Role of Set-Off Clauses in Intercreditor Agreements

Updated: Jan 23, 2023

Intercreditor agreements are contracts that are entered into between multiple creditors in a single debt deal, in order to establish the rights and obligations of each party and to ensure that the overall structure of the deal is fair and balanced. These agreements can be complex and can involve a range of different provisions and clauses, including set-off clauses.

Set-off clauses in intercreditor agreements are used to offset or reduce the amount that one party owes to another by the amount that the other party owes to the first. These clauses are typically exercised when a creditor is seeking to recover a debt from a debtor, and can be used as a means of reducing the overall amount of the debt owed. For example, if a creditor, such as an investment bank, is owed £100 by a debtor, such as a corporate, through a drawn revolving credit facility and the debtor is also owed £20 by the creditor in the form of In-The-Money FX contracts, the creditor may exercise its set-off clause to reduce the amount of the debt owed to it by £20, so that the debtor only owes £80 to the creditor.


Set-off clauses can be used in a variety of different ways in intercreditor agreements. One common use is to protect the interests of creditors by providing them with a means of recovering their debts in the event of default. In many cases, creditors will require that a company pledge certain assets as collateral to secure a loan. If the company subsequently defaults on the loan, the creditor may exercise its right to seize the collateral in order to recover its losses. However, the value of the collateral may not always be sufficient to fully cover the outstanding debt. In these situations, creditors may use set-off clauses to offset the remaining balance of the debt against other assets or obligations that the company owes to the creditor.


Another use of set-off clauses in intercreditor agreements is to manage the risk of cross-defaults. In many cases, a company may have multiple creditors, each with its own set of terms and conditions for the debt. If one creditor were to default on its obligations, it could trigger a cross-default clause in the agreements with other creditors, potentially leading to a cascade of defaults. To mitigate this risk, creditors may use set-off clauses to offset their obligations to each other, effectively insulating themselves from the risk of cross-defaults.


Set-off clauses can also be used in intercreditor agreements to facilitate the restructuring of corporate debt. When a company is struggling to meet its financial obligations, it may seek to restructure its debt in order to better align its payments with its ability to generate cash flow. In these situations, set-off clauses can be used to offset the balances of different debts against each other, allowing the company to more easily negotiate a new repayment plan with its creditors.


It is important to note that set-off clauses in intercreditor agreements are not always straightforward, and can be subject to a variety of legal and regulatory constraints. In some cases, set-off clauses may be limited by the terms of the underlying debt agreements, or may be subject to the approval of a court or other third party. Additionally, set-off clauses may be limited by local laws and regulations, which can vary significantly from one jurisdiction to another. As a result, it is essential for parties involved in intercreditor agreements to carefully consider the potential legal and regulatory implications of any set-off clause before entering into it.


In conclusion, set-off clauses play a critical role in the management of corporate debt deals, and are frequently used in intercreditor agreements to protect the interests of creditors, manage the risk of cross-defaults, and facilitate the restructuring of corporate debt. While set-off clauses can be complex and subject to legal and regulatory constraints, they remain an important tool for parties seeking to navigate the often-turbulent waters of corporate finance.


In order to effectively use set-off clauses in intercreditor agreements, it is important for parties to carefully consider the potential legal and regulatory implications of these clauses and to clearly define the rights and obligations of each party. By taking a careful and thoughtful approach to the use of set-off clauses, parties can help to ensure that their intercreditor agreements are structured in a way that is fair and balanced, and that maximizes the chances of success for all involved.


Further information


To enquire, please contact info@langdoncap.com.


About the author


Sabbir Rahman is Managing Director of Langdon Capital and a Partner at Bridging Funding. He has held prior roles with Morgan Stanley, Lazard and Deutsche Bank. He has executed over £60 billion of debt and equity financings, debt refinancings, debt restructures, mergers, acquisitions, carve-outs, divestments, PE-exits, JVs, minority interest investments and derivatives transactions with private equity funds, financial sponsor groups and global corporates over his career.


About Langdon Capital


Langdon Capital provides in-house transaction services to C-suites and Boards of publicly-listed and PE-backed businesses during the negotiation, execution and due diligence of corporate finance and capital markets transactions and senior interim leadership resourcing across finance, treasury, strategy and corporate development | contact info@langdoncap.com | visit www.langdoncap.com


About Bridging Funding


Bridging Funding is a direct lender of commercial property bridging loans across England, Wales and select South-East Asian markets. We lend between £200k and £20m per transaction. As a private credit fund, our credit sanctioning process is leaner and more flexible than competitors who are funded by bank capital | contact sr@bridgingfunding.com | mention code “Langdon” for preferential rates | visit www.bridgingfunding.com


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